Yesterday, President Obama announced his intention to nominate Ben Bernanke to a second four-year term as Chairman of the Federal Reserve Board. Bernanke’s tenure coincided with the most chaotic and painful period in modern financial history. Bernanke has overseen a previously unimagined expansion in the range of Fed programs, and he played an important part in the nearly unprecedented expansion of the role of the government that has taken place over the past year.
Bernanke’s reappointment must now be confirmed by the Senate. Before endorsing a second term, members must be assured the Fed will return to its core mission, that the recent expansion in its activities will subside quickly, and that the Fed’s balance sheet will be reduced expeditiously roughly to previous levels. Specifically, senators should ask the nominee for firm – and positive – answers to four key questions:
• Will he clearly describe and execute a firm exit strategy, unwinding the actions taken as part of its various emergency interventions? Since last fall, the Federal Reserve has undertaken vast new programs to support financial institutions, increasing its balance sheet, expanding the reach of its authority, and — to an as yet poorly understood extent — redefining its role in financial markets. Whatever the propriety of these actions, Bernanke should now must set – and execute — a firm, expeditious, and transparent “exit strategy” from these extraordinary interventions (even if doing so increases the level of stress in financial markets or the economy generally).
• Will he maintain low and stable inflation? The core mission of the Fed includes providing liquidity through its monetary authorities so as to maintain low and stable inflation, even when the economy is growing or shrinking rapidly. Successfully carrying out this mission in the coming years will likely prove extraordinarily difficult given the immense expansion of excess reserves by the Fed and central banks around the world to combat the recent crises in financial markets. Bernanke should commit to continue to focus on this as a top priority.
• Will he reject expansion of the Fed’s regulatory role? In the wake of last year’s financial crisis, many proposals for financial regulatory reform have been put forward would vastly expand the role of the Fed in regulating financial institutions, giving it ill-defined authority to protect against “systemic risk”. But adding such a mission to the Fed would reduce its ability to focus on monetary policy–its key role–and expose it to even more political pressure than it now faces. Bernanke should provide firm assurances that he will preserve the Fed’s focus on its core monetary policy duties, and not support such an expansion of its mission.
• Will he resist creation of an international financial regulator? Bernanke should provide assurances that he will forcefully resist pressures from Europe and other quarters for a supranational financial regulatory authority that would diminish U.S. sovereignty and could greatly limit financial innovation and economic growth in the decades ahead.