Welcome to the “Big Ben Show: Part II” – coming to an economic crisis near you in 2010.
Federal Reserve Chairman Ben Bernanke, after some tough grilling by Congress, survived the U.S. Senate Banking Committee’s confirmation hearings last week. Now he’s all set to resume command of the Federal Reserve – and Americans have every right to wonder what Bernanke has up his sleeve as 2010 beckons.
The Federal Reserve Chair’s current term was set to expire on January 1, 2010 (although Bernanke must still be confirmed by the full Senate – but that’s a formality in the eyes of Fed watchers).
What will a new term mean to the Fed – and more importantly to U.S. banking consumers?
For starters, the heavy lifting needed to guide the U.S. economy out of the worst economic crisis since the Great Depression appears to be over. But heavy it was. The Federal Reserve, under Bernanke’s stewardship, flooded the U.S. credit and financial markets with $1 trillion in assets – and politicians will be reluctant to keep the spigot flowing.
That may leave Bernanke with fewer options than he’d like, but he still has some arrows in his quiver. Here are some moves Bernanke is likely to take in 2010:
Toughen bank regulations – In refusing Bernanke more taxpayer money (so far), Congress seems set on directing the Federal Reserve to stiffen regulations on U.S. banks – especially those who took TARP money in a period of deep U.S. unemployment and rampant bank foreclosures. Expect Bernanke to steer banks on a course that’s more favorable to Main Street than it is on Wall Street.
Raise interest rates by mid-2010 – Mortgage shoppers won’t like it, but Mr. Bernanke will eventually have to direct the Federal Reserve to raise short-term interest rates, probably by the summer of 2010. While lower interest, by Bernanke’s own words, can stimulate private-sector borrowing and spending, the Fed has cut rates to the bone, resulting in outflows of cheaper money for banks and other financial institutions. But all that “free” money comes at a price. Left unchecked, low rates and cheap money usually lead to inflation, where Americans would pay more for the goods and services than they do right now. Bernanke can’t afford to let that happen in an economic recovery that’s decidedly fragile.
The end of buying mortgage securities in the open market – The Fed, under Bernanke, has kept mortgage rates artificially low by buying up $1 trillion worth of mortgage securities. Those mortgage purchases have helped drive down mortgage rates to historic lows. But the Fed has already indicated it would stop the mortgage security-purchase program, most likely by next March. That action should trigger a hike in mortgage rates once again, by the summer of 2010.
Not every economist, pundit or U.S. Congress person is thrilled with the job Ben Bernanke has done as the head of the Federal Reserve Chair. But Americans love a second act, and Bernanke’s should be a doozie.