By Lynn Reaser
Hostility towards Wall Street banks propelled congressional opposition during this past week to confirmation of Ben Bernanke to another term as Federal Reserve Chairman. Stock prices plunged in response. Although any likely alternative choice to succeed Mr. Bernanke would probably not lead any major change in Federal Reserve policy, investors detest uncertainty. With the economic recovery still fragile, any fall in business and consumer confidence related to a shaky stock market could not come at a worse time.
As the countdown to the end of Mr. Bernanke’s term has entered its final week, the likelihood that he will be confirmed has increased. Financial markets will certainly breathe a sigh of relief if he receives the votes to continue as Chairman.
The Federal Reserve, however, has clearly suffered a loss in public confidence and will see at least some erosion of its political independence. Monetary policymakers have always been accountable to Congress, but with the exception of semi-annual visits by the Chairman to Capitol Hill, the Fed has encountered little political meddling or jawboning. That seems now likely to change.
In particular, Federal Reserve efforts to tighten monetary policy could see considerable public criticism unless the economy and the job market are on a clear path of improvement. If inflation remains tame, monetary policymakers might not need to move quickly, but there is a risk that they could wait too long to rein in the massive amount of liquidity they have supplied. This could trigger a new bubble in asset markets or higher inflation, which would certainly be an unwelcome outcome.