Monday, January 25, 2010

Fed chief vote fans economic fears

WASHINGTON — A defeat of Federal Reserve Chairman Ben Bernanke's quest for another four-year term could raise the risk of a "double-dip" recession if political jousting over a successor were to drag on for months, economists warn.
But Bernanke's prospects appeared to brighten Sunday, with three more senators, including Republican leader Mitch McConnell of Kentucky, predicting that he'll be confirmed. A vote is expected later this week.

Still, the chance of Bernanke's defeat has unsettled Wall Street, contributing to last week's 4 percent loss by the Dow Jones industrial average, its worst performance in 10 months. If Bernanke were rejected, uncertainty over a successor would further roil global markets, at least in the short run.

Anxiety, along with sagging investments, could cause consumers and businesses to cut spending. Joblessness, already at 10 percent, could worsen. And the recovery might fail.

Economists who fear a double-dip recession — in which the recovery would collapse into another recession — regard it as a worst-case scenario. But they don't rule it out, either.

Bad timing for economy

Lynn Reaser, chief economist for the National Association for Business Economics, is among them. She sees the likelihood of a double-dip as less than 50 percent.

"It will become more acute if there are delays in confirming a successor," she said, noting that the economic recovery remains fragile, with spending still weak, credit tight and job creation scarce.

"All the political angst over the confirmation couldn't have come at a worse time for the economy," Reaser said.

A Bernanke loss would heighten uncertainty about Fed policies on interest rates and stimulus measures. In part, that's because Bernanke devised the unconventional supports for the economy and probably knows how best to safely wind them down, said Edward Yardeni, chief investment strategist at Yardeni Research.

But even more worrisome for the markets and the economy would be if Bernanke's Senate foes are seen as having meddled with the Fed's independence for political reasons.

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