Investors are increasingly worried by threats in Congress to delay the reappointment of Fed Chairman Ben S. Bernanke and meddle in the Federal Reserve's decisions on interest rates, fearing a politicization of the agency with the greatest reach over the economy and markets.
Some Fed watchers say the central bank already is kowtowing to critics in Congress by promising to keep interest rates near zero for an "extended period" - as long as the politically sensitive unemployment rate remains near its current 10 percent.
"Congress has a seat" on the Fed's rate-setting committee as long as the Senate strings out a vote on Mr. Bernanke's nomination and legislators debate whether to restrict or eliminate the Fed's roles as bank regulator and consumer protection agency, said Bernard Baumohl, chief global economist at the Economic Outlook Group.
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"Even the slightest whiff of higher rates will raise the ire of congressional leaders, who are already only too happy to tighten the reins on the Fed," he said. "We suspect no one on the [rate-setting committee] wants to provoke Congress" as long as it is debating financial restructuring legislation that would strip away some of the Fed's regulatory powers.
Mr. Baumohl said the Fed is inclined to keep rates low for a long while - it historically has waited until six months after the unemployment rate peaks before raising rates - but financial markets are sensitive to any signs that Congress might interfere with timely Fed moves aimed at pre-empting inflation.
At the center of the controversy is Mr. Bernanke, the mild-mannered former professor who enraged the far left and far right by arranging bailouts of big banks, even as major media outlets lauded him for setting up the Fed as a bulwark against recession and financial crises.
A Senate floor vote is expected on Mr. Bernanke's nomination next month, but an unusual coalition of liberal and conservative Fed opponents is threatening to delay the vote with a filibuster. Mr. Bernanke's four-year term as chairman is due to expire at the end of January.
Brian Gardner, a Washington analyst at Keefe, Bruyette & Woods Inc., said the Senate Banking, Housing and Urban Affairs Committee's 16-7 vote on Dec. 17 sending Mr. Bernanke's nomination to the floor may have been the high point of support for the Fed chairman in Congress. He estimates that 20 to 30 senators - including most Republicans - will vote against Mr. Bernanke in the full Senate.
"The month between now and a Senate floor vote could be an anxious one for Mr. Bernanke," he said. "We think the markets are still counting on a second Bernanke term, but any further erosion of support could start to spook some investors."
David Wyss, chief economist at Standard & Poor's Corp., said foreign investors are most likely to be upset by attempts to intimidate the Fed or limit its legendary independence. Among the senators who say they intend to use their filibuster powers to try to rein in the Fed are Sen. Bernard Sanders, Vermont independent and one of the Senate's most liberal members, and Sen. Jim DeMint, South Carolina Republican and one of the chamber's most conservative members.
Mr. DeMint said the intent of their filibuster threat is to force a vote on legislation authorizing the Government Accountability Office to conduct a full audit of the Fed, including its monetary policy operations. Financial analysts say the bill, with 30 Senate co-sponsors, poses the biggest challenge to the Fed's independence since it was codified into law in the 1970s.
"Under Mr. Bernanke's leadership, the Fed has lent several trillion dollars to failing financial institutions that should have been held accountable by market forces," Mr. DeMint said.
"The total amount of these bailouts exceeds the entire annual budget of the United States. Yet the public has not been given adequate information about these bailouts. In fact, Mr. Bernanke has led the fight against" the bill.
Mr. Wyss said foreign investors, who have been instrumental in financing nearly half the government's publicly held debt, fear such a broad attack on the Fed's independence.
"The Senate might delay a vote," he said, and investors "could take the delay badly."
So far, however, congressional leaders have fended off the bill, said Brian Bethune, an economist at IHS Global Insight.
"It would deal a serious body blow to the independence of the Federal Reserve," he said, but "we believe that general support in the Senate and House for such a change is very limited, even though this idea seems to be getting considerable play in the media."