Italian Elections Give Bernanke a Breather

NEW YORK (TheStreet) -- Federal Reserve Chairman Ben Bernanke was set up for a tough couple of days testifying before Congress this week, but Monday's surprising Italian election results mean investors will be focused on Europe.

That's probably just fine with the central bank boss, who is facing increasing scrutiny over his unprecedented tripling of the central bank's balance sheet. The Fed now owns more than $3 trillion in mortgage-backed securities and Treasury bonds, and prominent economists outside the Fed as well as members of the Federal Open Markets Committee (FOMC) are growing increasingly uncomfortable about how the Fed will back away from this stimulus without causing a sharp rise in long-term yields, leading to a market panic.

An 89-page paper presented at a conference Friday by four economists, including former Fed Gov. Frederic Mishkin, warned that the bank's attempt to exit its bond portfolio could lead to large losses on its balance sheet, inciting a loss of public confidence in the central bank.

The minutes from the most recent FOMC meeting revealed similar worries.

"Many participants also expressed some concerns about potential costs and risks arising from further asset purchases," the minutes said. "Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability."

Bernanke will surely be asked about these issues when he appears before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. However, the issues being raised by the outside economists and the members of the FOMC may take years to unfold.

Meanwhile, the European debt crisis is making its impact felt in real time.

While some observers had been suggesting the European crisis might be over due to a greater-than-expected German resolve to keep the euro intact with all of its members, Italy's election results Monday ignited new fears. Italians put the lie to that thesis, however, by delivering a resounding defeat to the Civic Choice, the centrist party of outgoing Prime Minister Mario Monti. Civic Choice, the party favored by German leadership, came in fourth place, behind populist comedian Beppe Grillo.

That drove a big selloff in equities, while the U.S. bond yields everyone fears will spiral out of control did just the opposite, as investors sought safety once again in U.S. Treasuries.

Bernanke will still get grilled this week, but it appears fewer investors will be paying attention.

-- Written by Dan Freed in New York