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Ben Bernanke Reconfirmed: Will He Get the Message?

The Senate voted 70-30 to reconfirm Ben Bernanke as Fed chair for another four years. The vote wasn't as close as I expected, but it was still the most negative votes since the 16 nay votes for Paul Volcker in his reconfirmation vote in 1983.

The vote demonstrates the political influence that both Congress and the President have over the Federal Reserve chair. In the design of the Federal Reserve System, the Fed is not supposed to be completely independent of political pressure. There are mechanisms in place that allow various political interests be represented in the deliberations over monetary policy. Though power has been centralized over time so that some of these mechanisms are now relatively weak, the set up of the system tries to ensure that banking, business, and the public interests are represented on the monetary policy committee. Power is also distributed geographically.

The Chair of the Fed serves a four year term and, unlike the 14 year term for Federal Reserve Board members, the Chair can be reappointed. The executive branch has political influence over the Chair of the Fed through its decision whether or not to reappoint the Fed Chair when the four year term expires. And as we have seen recently, Congress also has power through its advice and consent role in the confirmation process (though there are questions about the extent to which Congress ought to use this power to block the president's choice).

Whether or not this is the best way to set up the central bank is something to consider, but the fact that there is political influence and representation is not at odds with the design of the Federal Reserve system.

The large number of negative votes, the concerns that some of the supporters have expressed, and the lukewarm support of the White House until the nomination looked to be in danger ought to send a clear-- and correct -- message to the Fed. When there is uncertainty about whether to pursue low inflation or low unemployment, low unemployment must prevail. If the Fed moves too fast to unwind the stimulus measures it has in place, increases in interest rates could kill the recovery and employment. But if it moves too slowly, it may have an inflation problem.

So far it has not been clear that the unemployment goal is preeminent, and going forward the Fed needs to demonstrate it gives unemployment the highest priority. Inflation must take a back seat whenever there's any doubt about which goal to pursue. If the Fed moves too quickly to raise interest rates at the expense of unemployment, it will deserve the backlash that will come.

In addition, Congress is not happy with the Fed's oversight role prior to the crisis. The Fed's failure to regulate risks adequately made a large contribution to the severity of the crisis, and it needs to do much, much better. Going forward, the Fed needs to demonstrate that it is willing to support and implement tough regulatory responses to the crisis. If it is unwilling to deal with the too big to fail problem, if it won't support limiting leverage, increased capital requirements, and so on, that will be disappointing.

I supported Ben Bernanke's reconfirmation, but if the Fed does not get the message, that support will not persist.

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