Obama to tap Bernanke for second term as Fed chief

U.S. President Barack Obama will nominate Ben Bernanke to a second term as chairman of the Federal Reserve Tuesday, keeping him on the job of guiding the world's largest economy out of its deepest downturn since the Great Depression.

Obama will make the announcement in Massachusetts with Bernanke at his side and will praise Bernanke's bold actions to save the financial system from collapse, a senior administration official said Monday.

Bernanke, whose appointment to a new, four-year term as head of the U.S. central bank must be confirmed by the Senate, has flooded crippled financial markets with hundreds of billions of dollars in Fed liquidity and stepped in to attempt rescues of failing financial institutions such as Bear Stearns and AIG.

Obama's Democrats control the Senate, but Bernanke has faced criticism from lawmakers of both parties who say he has gone too far in extending Fed support that will be difficult to unwind, threatening future inflation.

Investors have generally given Bernanke high marks on the job and had widely expected him to be kept on by Obama, although the announcement was not expected until later this year.

Analysts said the early move by Obama -- well before Bernanke's four-year term ends on January 31, 2010 -- would be welcomed by financial markets and end any lingering worries about who might lead the Fed as it nurses the economy back to health.

Agree or not, the types of applications and the size of (the Fed's) intervention are now established in the annals of Fed policy making as one of the most dramatic responses ever, said David Kotok, chairman of Cumberland Advisors in Vineland, New Jersey.

Bernanke, a 55-year-old former Princeton University economics professor, was appointed by Obama's Republican predecessor, President George W. Bush, to succeed Alan Greenspan, who stepped down in January 2006

Widely respected as a top scholar on the Great Depression, Bernanke has long called for a more transparent central bank.

While praised for his decisiveness in the heat of crisis, Bernanke has also faced criticism for being slow to lower interest rates as the economy started to deteriorate in 2007, and for failing to spot the housing bubble and push for tougher mortgage lending rules when he was a Fed Board member earlier in the decade.

'BOLD ACTION'

In remarks prepared for delivery at an event in Martha's Vineyard, where Obama is on vacation, the president will also say the U.S. auto industry is showing signs of life and the U.S. credit and housing markets have been saved from collapse, the official said.

The man next to me, Ben Bernanke, has led the Fed through one of the worst financial crises that this nation and this world have ever faced, Obama will say in a statement to the media at 9 a.m. EDT/1300 GMT.

Obama will say Bernanke had dealt with the financial crisis with bold action and outside-the-box thinking that has helped put the brakes on our economic freefall.

Our auto industry is showing signs of life. Business investment is showing signs of stabilizing. Our housing market and credit markets have been saved from collapse, Obama will say.

Obama also will hit back at Bernanke's critics, defending Bernanke's actions as steps of necessity, not choice.

Taken together, all of these steps have brought our economy back from the brink. They are steps that are working.

Bernanke has sketched out an exit strategy to pull the economy back from exceptionally low interest rates and extricate the Fed from a flood of loans to financial markets without sparking inflation, although some analysts are skeptical the U.S. central bank can pull off the task.

The Fed has said that due to continuing weakness in the economy and continuing job losses, it is not yet time to withdraw the support.

As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another, Obama will say.

But because of his background, his temperament, his courage, and his creativity, that's exactly what he has helped to achieve. And that is why I am reappointing him to another term as chairman of the Federal Reserve.

(Additional reporting by Megan Davies in New York and Anthony Boadle in Washington)