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Bernanke on perilous ground for Fed chairman

Bernanke on perilous ground for Fed chairman

November 20th, 2010 in News

Federal Reserve Chairman Ben Bernanke is taking some highly unusual steps to counter widespread opposition to his $600 billion plan to jump-start the economy. He's pressing China to let its currency rise and pushing Congress to pass more stimulus aid.

Yet as he veers into these political debates, Bernanke may be putting at risk the Fed's strongest tools - its credibility and independence.

Bernanke has been under fire since Nov. 3, when the Fed announced a bold plan to buy $600 billion in Treasury bonds. The bond purchases are intended to lower long-term interest rates, lift stock prices and encourage higher spending to energize the weak economy.

In rat-a-tat fashion, critics have attacked the Fed's program. They've warned that the bond purchases will eventually ignite inflation or a wave of speculative buying on Wall Street. China, Germany and other countries have labeled the bond purchases a scheme to drive down the dollar and give U.S. exporters an unfair price advantage. A lower dollar makes U.S. products cheaper for foreign buyers.

Bernanke has struck back in unusually blunt style for a Fed chairman. In a speech at a banking conference in Frankfurt, Germany, he made his most forceful case to date that high unemployment and slow growth, not inflation, are the biggest risks to the U.S. economy. He also accused China and other emerging nations of endangering the global economy by keeping their own currencies artificially low.

Critics see Bernanke's ventures into congressional and global policymaking as a sign of weakness, not strength. If he were confident the Fed's polices were either succeeding or enjoyed support, Bernanke wouldn't feel compelled to try to sell them publicly.

"He needs help, and he doesn't think he's getting it," Dan Greenhaus, chief economic strategist at Miller Tabak, wrote in a research report published Friday.

In pressing Congress and the Chinese to change policy, Bernanke is barging into the political arena, taking on issues like currency valuations that are normally handled by the treasury secretary, a political appointee.

He also risks endangering the Fed's reputation for independence. The Fed needs its credibility to make unpopular decisions, such as raising interest rates to fight inflation, without being smeared as politically motivated.