The Federal Reserve's Rocky Road

The Federal Reserve faces some critical postelection decisions in the face of the most vehement criticism since the early 1980s, when then-Chairman Paul A. Volcker pushed the economy into recession to combat a 13% inflation rate.

The new challenges include:

What to do about economic policy. Over the past few months, the Fed has moved cautiously on whether to take further action, but the next few months could alter that. If the recovery accelerates, or if the economy begins to slump again, it may have to shift course. What to do next will involve a heated internal debate.

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If the economy begins to improve, in the next few months the Fed may begin phasing out the stimulus it's been providing and nudge interest rates up. (One caveat: If the economy picks up before the election, the Fed won't tighten money and credit policy immediately. Officials don't want to risk being blamed for blunting an economic comeback.)

But if the recovery remains anemic or is battered by sharp spending cuts, the Fed may resume its quantitative easing, buying up Treasury bonds to create more liquidity. The Fed's board is currently split over whether to follow that course now, but its dissenting governors almost certainly would agree to more easing if a slump loomed.

How to proceed in its role as a bank regulator. The central bank has been widely criticized for being lax as an overseer of the banking system. Besides failing to rein in irresponsible bank practices that led to the 2008 collapse, it has done little to punish banks for their transgressions. It's under pressure from Democrats to crack down on industry excesses.

What to do about the Dodd-Frank law. If Republicans win the White House and Congress, they'll push for a recall of some of the regulations stemming from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which they argue impede banks and other financial firms. Obama wants to keep the rules intact.

How to stave off congressional threats to its independence. The Fed has become a whipping boy for Congress, particularly among conservative Republicans, who are sensitive to tea party pressures. Critics say its low-interest policies have hurt senior citizens' savings income and encouraged overlending in the home mortgage market. It's also being faulted for failing to crack the whip as a bank regulator, which critics say led to irresponsible risk-taking by banks and a series of bank scandals.

The House already has passed legislation that would mandate an outside “audit” of the Fed's books -- a bill that Fed backers fear will become a first step toward giving Congress more say in the agency's decisions. But the legislation isn't likely to go any further, keeping the central bank safe from serious erosion of its independence.

Whether Ben Bernanke will keep his job as chairman. Obama and his top policymakers seem satisfied with him, but Republicans regard him as weak and too ready to cooperate with the White House. Bernanke, 58, will be up for reappointment as Fed chief in January 2014, though his term as a Fed governor doesn't expire until early 2020.

Look for Bernanke to stay on if Obama wins reelection, but Romney most likely would replace him as Fed chief in 2014, with Glenn Hubbard or one of former President George W. Bush's top economic advisers. There's no indication of whether Bernanke would choose to remain on the Fed's board if he weren't chairman.