Bernanke's battle may scar Fed

WASHINGTON: Fedchairman Ben Bernanke survived a Senate battle, bruised. The question is whether the Federal Reserve was scarred, too. The anti-bailout anger that eroded Bernanke’s support in the Senate on Thursday produced the most “no” votes ever on the confirmation of a Fed chairman.

That could have lasting impact on the Fed’s ability to manage the economy without regard to the political winds. To shore up his support, Bernanke made the rounds with congressional leaders, meeting privately with senators including Senate Majority Leader Harry Reid and Dick Durbin, the No. 2 Democrat leader in the Senate, in the days leading to Thursday’s 70-30 confirmation vote.

Bernanke was in the awkward position of having to lobby for his own job and defend the Fed against efforts to strip it of some of its regulatory authority. Those meetings alone raise at least the perception of a Fed co-dependency with Congress. What, if any, assurances did Bernanke give lawmakers about interest rates and other Fed policies? “We don’t know what Bernanke agreed to do in those meetings, what he promised,” said Allan Meltzer, a professor at Carnegie-Mellon University and author of a history of the central bank. “The Fed’s job is to be independent, and the Fed isn’t doing that.”

The Fed often must make decisions, such as raising interest rates to keep inflation in check, that are unpopular with individuals and companies. Its role in bailing out Wall Street banks to prevent a broader crisis angered the public, too. That’s why economists say the Fed’s political independence is essential to its mission. Its interest-rate policy can have huge consequences, affecting everything from large companies, to a homebuyer’s ability to get an affordable loan, to the price of cereal. Any influence from the political arena risks compromising the Fed’s credibility.

Keeping rates too low for too long could unleash inflation and trigger another speculative bubble like the one in housing that plunged the country into a recession in the first place. Senate opposition to Bernanke intensified after Republican Scott Brown’s upset victory in the Senate race in Massachusetts. Brown’s election jolted congressional Democrats and led some to reconsider their support for Bernanke. The Fed chairman’s critics cast him as a symbol of the Wall Street bailouts. “This is a perfect example where the world of politics collides with the world of economics, and the result is not good,” said Kenneth Thomas, a lecturer.