Ben Bernanke helped to save the global economy from financial ruin, but now he faces an equally challenging task.
Armed with a fresh four-year appointment from Barack Obama, the Federal Reserve chief must nurse back to health a U.S. economy hobbled by a staggering deficit, a broken banking system, a near 10 per cent jobless rate and a historic housing slump.
The U.S. President ended months of speculation yesterday by giving George W. Bush's central banker a second term that could prove even more testing than his first.
The key risk the Fed faces in the next couple of years is to carefully soak up record amounts of cash that it has pumped into the economy and the banking system, without plunging the U.S. into a dreaded 1937-style double-dip recession or sparking damaging inflation.
Speaking from the swank island retreat of Martha's Vineyard, Mass., where he's vacationing, Mr. Obama praised Mr. Bernanke, 55, for leading the Federal Reserve through "one of the worst financial crises that this nation and the world has ever faced."
But he also acknowledged the pitfalls ahead for Mr. Bernanke, and his administration.
"No matter how difficult change is, we will pursue it relentlessly because it is absolutely necessary to lift this country up and create an economy that leads to good jobs, broad growth, and a future our children can count on," Mr. Obama said at a local elementary school, Mr. Bernanke at his side. "That's what we're here to do."
Mr. Bernanke, whose nomination must be confirmed by the Senate, accepted his reappointment as the White House and the Congressional Budget Office released ugly new estimates of the swelling deficit.
Indeed, some analysts suggested the White House carefully orchestrated the Bernanke announcement -- which comes five months before the expiry of his term -- to overshadow the grim outlook for the economy. Officials acknowledged Mr. Bernanke accepted the job extension a week ago, but the news was withheld until Monday evening.
The White House is now forecasting a record $1.58-trillion (U.S.) deficit in fiscal 2009 - 11.2 per cent of gross domestic product - and $1.5 trillion in 2010.
Both the White House and the CBO now forecast deficits of more than $500-billion for he next decade, averaging 5.1 per cent of gross domestic product, or well above the government's unofficial comfort zone of three per cent. The deficit hit a record of $459-billion last year, or 3.2 per cent of GDP.
Between now and 2019, the U.S. government is on track to spend $9-trillion more than it collects in taxes, according to the White House.
And it isn't just the deficit that's getting worse. The administration is now predicting that unemployment will top 10 per cent by early next year, from 9.4 per cent in July, and that the economy will grow two per cent next year and 3.8 per cent in 2011 after shrinking this year.
There was another hint yesterday that the long housing slump is nearing an end. House prices edged up 0.7 per cent in June, according to the S&P Case-Shiller index of prices in 20 key markets. Prices are still 15.5 per cent below where they were last year and more than 30 per cent off their 2006 peak.
And Yale University economist Robert Shiller, who helped create the index, warned it could take six years for prices to fully recover to pre-crash levels. "There are a lot of problems out there," he told CNBC.
Many Wall Street economists welcomed the news that Mr. Bernanke will stay on at the Fed during unsettling times.
"The reappointment ensures continuity in policy as the Fed faces the challenges presented by the economy's exit from recession," JPMorgan Chase economist Bruce Kasman said.
The Fed's balance sheet, which Mr. Bernanke has pushed to a record $2.5-trillion, must eventually come down if the Fed wants to keep inflation at bay.
So far, he has assured markets he'll gradually remove that stimulus by allowing various purchases of bonds to mature naturally. He's also vowed to keep its key interest rate near zero so long as the economy remains weak.
Mr. Kasman said he doesn't know if Mr. Bernanke can pull off a smooth exit strategy. But the re-appointment does "reinforce credibility that the Fed will maintain leadership with a strong commitment to this plan," he said.
Not everyone is happy Mr. Bernanke will stay at the Fed beyond January. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, complained the Fed chairman is "waist deep" in blame for the financial and economic meltdown.
Mr. Baker pointed out that Mr. Bernanke, a former Princeton University economist, has been a Fed governor since 2002 and a top Bush administration adviser in 2005 and 2006. And yet he failed to predict or thwart the bursting of the financial bubble, Mr. Baker said.
Many members of Congress have also been harshly critical of the Fed's role in the bailouts of insurer American International Group and Bear Stearns and in the merger of Bank of America and Merrill Lynch.