Bernanke’s Midterm Tests

The chairman of the Federal Reserve has come to seem a bit like a Supreme Court justice — an unelected, unaccountable figure who wields power for years, regardless of who’s in the White House.

Since World War II, three men — Alan Greenspan, Paul Volcker and William McChesney Martin — have dominated the Fed, running it for a combined 45 years. All of them were named to the job by a president from one political party only to be reappointed by a president from the other. It’s become custom to treat the Fed chairman as a nonpartisan economic sage, rather than as a political appointee.

But it is nothing more than custom. By law, a chairman’s term lasts only four years. And this Friday, Ben Bernanke will reach the halfway point of his first term. Sometime before Feb. 1, 2010, the next president will have to decide whether Mr. Bernanke should get a second term.

His timing certainly hasn’t been the luckiest. He took over just as the real estate market was peaking, and the resulting bust has left the economy on the brink of recession. Assuming that the Fed cuts its benchmark interest rate another half of a percentage point on Wednesday, as the markets expect, it will have reduced the rate 1.25 points in a week and a half. During Mr. Greenspan’s 18-year term, through two bear markets, the 9/11 attacks and various other financial crises, he never had to reduce rates so sharply.

Mr. Bernanke continues to command deep respect from many economists, who praise his creative responses to the mortgage crisis and his attempts to lift the Fed’s veil of mystery. But Wall Street and, to some extent, Washington have been less impressed.

His efforts at openness have sometimes sowed confusion about what the Fed was really doing, and he and his colleagues have appeared slow to grasp the depth of the economy’s problems.

“It’s been a difficult and unusual period, and they’ve struggled a bit,” as John Makin of the American Enterprise Institute, a conservative group, said. “They haven’t been very steady.”

So it seems fair to ask two questions at the midway point of Mr. Bernanke’s term. What are his odds of being reappointed? And based on what he’s done so far, is he likely to deserve another term?

The answers to the two questions, unfortunately, have less to do with each other than you may imagine. The Fed may have the reputation of an all-powerful institution, but it mainly regulates banks and sets short-term interest rates. It doesn’t run the economy.

If the real estate slump does lead to a nasty recession — or even just 18 months of slow growth and rising unemployment — it may not matter what Mr. Bernanke does. By reappointing him, a new administration would be tying itself to the Bush administration and the housing bust.

Last week, while interviewing John McCain, I was surprised that he was already trying to put a little distance between himself and the Fed. We had been talking about Mr. Greenspan — whom Mr. McCain loves to praise — when I asked how he thought Mr. Bernanke was doing. I figured he would duck the question, because presidents (and presidential candidates) have made a practice of not talking about the Fed. They generally want to show that they understand that it’s an independent body.

But Mr. McCain said he wasn’t sure whether Mr. Bernanke had taken the right steps or done so quickly enough. I then re-asked the question, to make sure he said what he’d wanted to. He paused and said, “It’s not clear yet.”

And Mr. McCain, like Mr. Bernanke, is a Republican. A Democratic president would have additional reasons to choose a new chairman. The job brings unmatched economic prestige. In a way no one else could, a Fed chairman could make headlines — and still manage to appear apolitical — by, say, reminding Congress about the relationship between tax cuts and deficits.

By 2010, almost a quarter-century will have passed since someone originally chosen by the Democrats — Mr. Volcker — was running the Fed.

In his recent memoir, Mr. Greenspan said he had assumed Bill Clinton wouldn’t reappoint him in 1996. “No doubt,” Mr. Greenspan wrote, “he would want one of his own.” In the end, Mr. Clinton did reappoint Mr. Greenspan, thanks largely to his inflation-fighting credibility on Wall Street.

E-mail: leonhardt@nytimes.com

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