The Senate voted 70 to 30 to give Bernanke four more years as the nation's most powerful economic policymaker, after a sometimes-heated debate in which members of both parties -- including some who eventually voted in his favor -- assailed the Fed's actions under his leadership.

While Bernanke won a majority of both Democrats and Republicans, he received more "no" votes than any Fed chairman before, topping Paul A. Volcker, who was confirmed 84 to 16 in 1983.

That congressional anger at the Fed -- and at Bernanke himself -- will color Bernanke's second term. The Fed is designed to be insulated from politics so that its leaders can take a long-term view, especially in setting interest rates. But the Fed is now under greater pressure than at any time in recent history. And after his relatively close call on confirmation, Bernanke may not have the political clout to fend off attacks on the central bank, said people who study the Fed.

"He's coming out of this with less political capital," said Brian Gardner, a Washington analyst for the investment bank Keefe, Bruyette & Woods. "How does he go back to ask senators who stuck their neck out for him to stick with him again? This leaves him in a weakened state."

Congress is considering stripping the Fed of its power to regulate banks, which Bernanke considers central to the Fed's mission. He views a separate congressional effort to initiate audits of the Fed's monetary policy to be a dangerous threat to the central bank's independence.

And the pressures on Bernanke could mount further when, at some point in his new term, the Fed will inevitably raise interest rates -- never a popular action. The Fed is now pulling out all the stops to support the economy, including keeping a key target interest rate near zero.

While the Fed has wide legal latitude to make its own decisions and even controls its own budget, the institution remains a creation of Congress, and lawmakers can change the rules under which it operates. So Fed leaders remain highly cognizant of concerns on Capitol Hill and in the executive branch.

The central bank has been under intense fire for its decision to bail out the insurer American International Group and for refusing to disclose which banks and other firms have tapped various emergency lending programs. Anger at the Fed has been brewing for more than a year, including over its role in bailing out financial firms and its regulatory failures that helped cause the crisis. Many lawmakers view the central bank as too close to Wall Street interests.

Still, until this month, Bernanke's nomination had appeared to face only modest opposition. It was thrown into question late last week amid a burst of populist sentiment among lawmakers after the surprising GOP victory in Massachusetts's special Senate election.

In agreeing to confirm Bernanke, some lawmakers have pursued concessions from him. Senate Majority Leader Harry M. Reid (D-Nev.), in announcing his intention to vote for Bernanke last week, gave an explicit signal that the vote comes with conditions.

"I made it clear that to merit confirmation, Chairman Bernanke must redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college or start a small business," Reid said in a statement. "He has assured me he will soon outline plans for making that happen, and I eagerly await them."

The Fed has undertaken a wide variety of programs to prop up lending in the past year, including supporting the mortgage market with $1.25 trillion and a program to support consumer and small-business lending that last week totaled $46 billion. But those programs are winding down as Fed leaders seek to avoid igniting inflation and to let private markets heal.

Among the significant challenges facing Bernanke in his second term will be calibrating how and when to withdraw those and other programs and deciding how quickly to raise the federal funds rate from near zero. Some on the Fed's policymaking committee are already agitating to move more quickly in removing the economic struts. This was illustrated by the decision of Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City, to dissent at a policymaking meeting this week over the Fed's time frame for ending the low-interest-rate policy.

But steps that would please Hoenig and others in his camp -- along with some Republican lawmakers who have pressed for a more restrictive monetary policy -- would alienate many others who argue that the economy is still so weak that the Fed should do all it can to support growth.

"Bernanke is going to face hostility no matter what he does now," said Diane Swonk, chief economist at Mesirow Financial. "This vote doesn't cure the hostility."

Bernanke will have a chance to set the tone for his second term in late February with his semiannual congressional testimony on monetary policy. It will be a test of whether Bernanke, whom many lawmakers respect personally even as they excoriate his policies, can finesse competing imperatives. He will have to defend actions that he and his Fed colleagues say are right without stoking congressional anger that could undermine the Fed's ability to function, for instance by auditing monetary policy.

Many senators who ultimately voted for Bernanke did so despite misgivings over the Fed's performance in the run-up to the crisis. But they ultimately concluded that his aggressive steps to contain the crisis once it began earned him another term.

"While the Fed did not do a good job of enforcing and updating the fire codes, it did a very good job of fighting the fire that broke out in the fall of 2008 and threatened to burn down the economy," said Sen. Sherrod Brown (D-Ohio), who voted to confirm.

Bernanke's supporters also argued that rejecting his reappointment would unsettle financial markets by creating greater uncertainly about financial policy. Some of the 22 Republicans who voted for confirmation said they did so because they were concerned that they would like potential candidates nominated by President Obama even less.

Jan. 29, 2010

www.washingtonpost.com/wp-dyn/content/article/2010/01/28/AR2010012800103_pf.html