January 29, 2008 / 3:25 PM / in 11 years

Weak growth, miscues may put Bernanke's job at risk

WASHINGTON/NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke’s job rides on protecting the U.S. economy from the worst of the fallout from housing and financial market turmoil, but politics and a few missteps could determine if he wins another term.

Chairman of the Federal Reserve Ben Bernanke waits to testify before a House Budget Committee hearing on Capitol Hill in Washington, January 17, 2008. REUTERS/Jim Young

Bernanke’s four-year term as chairman expires on January 31, 2010. The next president, who will take office in early 2009, may consider whether to tap someone else to lead the Fed.

While highly regarded as an economist and praised for his efforts to demystify the central bank, Bernanke’s first two years in office have been dotted with controversy. Lately, he has faced a storm of criticism for his handling of a financial crisis that burst into public view in August.

“They have contributed to the volatility,” said Richard Gilhooly, fixed-income market strategist at BNP Paribas in New York. “Much of the fear of recession is based on a confusion, a lack of understanding and a lack of confidence in the policy that is being administered by the Federal Reserve.”

As stocks at home and abroad tumbled in the early weeks of the new year, the Fed surprised financial markets on January 22 with an interest rate cut of three-quarters of a percentage point. The cut, which came a week before the Fed’s next scheduled policy meeting, left the benchmark federal funds rate at 3.5 percent.

The Fed’s policy-making Federal Open Market Committee is expected to lower interest rates by at least another quarter point at a two-day meeting ending on Wednesday — just a day before Bernanke reaches the halfway point in his term as chairman.

TURNABOUTS

Ultimately, Bernanke’s success in guiding the Fed will be judged on how short and shallow any U.S. downturn is and whether a recovery is on solid footing by early next year.

But a series of stumbles dating back to the beginning of his tenure may build a case against his reappointment.

In April 2006, as the Fed was trying to decide how high to push borrowing costs, Bernanke told Congress the Fed could take a pause at some point in its rate-hiking campaign, remarks that led to a rise in inflation expectations.

Days later, CNBC anchorwoman Maria Bartiromo said Bernanke had told her at a dinner that markets had misconstrued his words to mean the Fed was done raising rates.

Analysts savaged him for disseminating policy comments through an informal conversation. Bernanke later called the episode a “lapse in judgment.”

Then, even as problems with subprime mortgages spread this summer, the Fed said on August 7 that inflation risks topped its concerns. But three days later, the central bank announced it stood ready to provide liquidity to cash-starved institutions, leading to complaints that the Fed was behind the curve.

In December, Fed officials acknowledged worsening financial conditions but trimmed rates by a slim quarter point. Markets felt whipsawed when the Fed unexpectedly announced special auctions designed to thaw frozen credit markets the next day.

Most recently, analysts have questioned whether the Fed panicked with last week’s surprise cut in borrowing costs, the steepest reduction in more than 23 years.

When France’s second-largest bank, Societe Generale, announced $7 billion in losses due to unauthorized trades by a single employee the next day, market participants wondered whether SocGen’s efforts to unwind those trades helped push markets lower and had misled the Fed into cutting rates.

IT’S THE ECONOMY, STUPID

Bernanke, who was named to the Fed by President George W. Bush after serving as chairman of the president’s Council of Economic Advisers, could face political obstacles if the White House’s next occupant is a Democrat.

Political analysts believe Democrats have an advantage in November’s presidential election because of economic uncertainties and other factors, but they also say it is an unpredictable time and anything could happen.

“I think a Democratic president might find someone who’s more in tune with Democratic views,” the chairman of the U.S. House of Representatives Financial Services Committee, Barney Frank, told Reuters.

Frank, a Massachusetts Democrat, said Bernanke’s proposals to strengthen consumer borrowing protections had not been strong enough, echoing complaints from other Democratic lawmakers. The congressman also questioned Bernanke’s effectiveness in blunting the effects of recent financial volatility.

“He was a little slow in cutting (interest rates). I think he was a little too concerned with inflation,” Frank said.

Historically, presidents have sought to avoid rattling financial markets by switching Fed chairs put in place by predecessors. Ronald Reagan stayed the course with Paul Volcker; Bill Clinton left Alan Greenspan at the helm.

Still, a Democrat might be inclined to pick among highly regarded economists or businesspeople with ties to the party to head the central bank.

Candidates could include San Francisco Federal Reserve Bank President Janet Yellen, who chaired the Council of Economic Advisers under Clinton, former Treasury Secretary Lawrence Summers, or former Fed Vice Chair Alan Blinder, analysts say.

Editing by Jonathan Oatis

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