Bernanke's Future in Doubt, Fed Holds to Course

Tuesday, 26 Jan 2010 03:31 PM

 

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WASHINGTON – The Federal Reserve opens a two-day monetary policy meeting Tuesday overshadowed by the suspense surrounding the confirmation of central bank chairman Ben Bernanke to a second term.

Analysts say the Federal Open Market Committee is likely to signal a steady policy course at its upcoming meeting, in an effort to keep a fragile economic recovery on track.

The Federal Open Market Committee is likely to keep the federal funds base rate at a range of zero to 0.25 percent, which has been in place for more than a year as part of a plan to revive economic activity.

Bernanke's fate hung in the balance as a growing number of senators caught in a new political landscape came out publicly opposed to the Fed chief for going too easy on Wall Street banks and doing too little for Main Street.

The Senate's top Democratic lawmaker, Majority Leader Harry Reid, said Tuesday that Bernanke's confirmation vote for a second term could come Thursday or Friday. His term expires Sunday.

With Bernanke's fate uncertain, questions remain on the Fed's so-called exit strategy from its massive stimulus to help lift the US economy out of its worst recession in decades.

Deutsche Bank economist Joseph LaVorgna said he does not expect any surprise from the Fed that might roil fragile financial markets.

"Policymakers will seek to avoid an outsized reaction from financial markets, which could perceive such a move to be the beginning of a rate-hiking cycle," he said.

Other questions remain about the Fed's plans to wind down a series of special programs aimed at pumping more than one trillion dollars into the financial system, initiatives set to expire in the coming months.

Sung Won Sohn, economist at California State University, said he has concerns about what will happen to the mortgage market and the overall economy if the Fed holds to its schedule of ending purchases of mortgage-backed securities at the end of March.

"Without the support of the Fed, the mortgage market would essentially fall apart," Sohn said.

"They said they would conclude their purchases by the end of March but I think there is a good chance they would have to extend it for fear the mortgage market would falter."

Others say the Fed will end this program as a test for the mortgage markets.

"While we expect the Fed's asset purchases to end on schedule in March, the committee is likely to keep the door open to extend or restart the program should conditions warrant," said Jan Hatzius, economist at Goldman Sachs.

Ryan Sweet, economist at Moody's Economy.com, said the key monetary policy meeting has taken a back seat to the political debate on extending Bernanke's term.

"Political tension combined with a fragile recovery gives the FOMC plenty of reason to sit tight at this week's meeting," he said.

Sweet said he expected Bernanke to ultimately be confirmed despite the noise.

But if he is rejected, Sweet said, "The impact would be seen immediately in financial markets. Investors will reassess expectations about when the central bank will start to unwind its emergency monetary stimulus policies... A refusal to give Bernanke a second term may be perceived as politicizing decisions on monetary policy, complicating matters for the central bank and damaging its credibility as well as its independence."

© AFP 2014

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