Aug. 24 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke, who led the biggest expansion of the central bank’s power in its 95-year history to battle the worst economic slump since the 1930s, will be nominated to a second term by President Barack Obama, said David Axelrod, Obama’s senior adviser.

Obama will make the announcement tomorrow on Martha’s Vineyard, Massachusetts, where he is vacationing with his family, and Bernanke is expected to join him, Axelrod said. The nomination requires Senate approval. Bernanke’s four-year term as chairman expires Jan. 31.

“The president believes that Bernanke has provided extraordinary leadership during the most difficult financial crisis we’ve faced since the Great Depression,” Axelrod said. “As we build our economy that leadership is still needed.”

Bernanke, 55, slashed the main interest rate almost to zero, pumped $1 trillion into the banking system and led rescues of Bear Stearns Cos. and American International Group Inc. He now must guide the world’s largest economy back to growth and reduce unemployment approaching 10 percent while shrinking the Fed’s balance sheet to prevent a surge in inflation.

“It’s not just that he’s done a great job of dealing creatively with the financial crisis,” said Richard Berner, co- head of global economics at Morgan Stanley in New York. “He has the capacity to deal with the challenges that lie ahead -- continuing to help the economy and markets heal and engineering the exit strategy when it’s appropriate to do so. ”

Tradition of Bipartisanship

Obama, a Democrat, continues a recent tradition of bipartisanship in his decision to nominate Bernanke, a Republican, to a second term.

Bernanke’s predecessor and fellow Republican, Alan Greenspan, served as Fed chief for 18 years while gaining renomination by three presidents, including Bill Clinton, a Democrat. President Ronald Reagan kept Paul Volcker, first selected by Jimmy Carter, for a second term.

The Fed chief faces threats to the central bank’s independence from members of Congress who say he overstepped his authority as he battled a crisis that froze credit markets and led to $1.6 trillion of writedowns and losses at financial firms. Bernanke was criticized as too slow to respond to the housing slump and for calling the crisis “contained” before reversing course in August 2007 and cutting interest rates.

House Legislation

Legislation in the House would subject the Fed’s monetary policy to audits by the Government Accountability Office, a change Bernanke opposes. Under a regulatory overhaul proposed by the Obama administration, the Fed would need the Treasury Department’s approval before invoking emergency powers used in bailouts and loans to non-bank financial institutions.

“It’s easy with hindsight to say he wasn’t perfect, he should have moved faster,” Laurence Meyer, vice chairman of Macroeconomic Advisers LLC and a former Fed governor, said in an interview in Jackson Hole, Wyoming, where Bernanke and other central bankers gathered Aug. 20-22 for an annual retreat.

“Once he did recognize the crisis, he moved extremely aggressively, very creatively and I think you have to take a step back and say that the efforts and the leadership he gave brought the economy back from the edge of the abyss,” Meyer said.

Almost 75 percent of investors surveyed in the first Quarterly Bloomberg Global Poll had a favorable view of the chairman in July. By almost a three-to-one margin, they said Bernanke had earned another four-year term.

“Bernanke is a source of certainty,” said Guy Lebas, chief-fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.

Market Rebound

The Standard & Poor’s 500 Index has risen 52 percent since a recession low on March 9. The S&P lost 38.5 percent last year. Credit markets have also recovered: The London Interbank Offered Rate for three months loans in dollars fell to 0.39 percent on Aug. 24. The rate surged as high as 4.81 percent in October.

Bernanke’s nomination comes as the world’s biggest economy is poised for renewed growth.

The economy will expand 2 percent or more in the four quarters through June, the first such streak in more than four years, according to the median of 53 forecasts in a Bloomberg News survey of economists. Gross domestic product has fallen 3.9 percent since the recession began in December 2007.

The Libor-OIS spread, a gauge of financial stress, fell to 20 basis points Aug. 24. The spread soared to 364 basis points on Oct. 10 last year after Lehman Brothers Holdings Inc.’s collapse. Greenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread was at 25 basis points.

Corporate Bond Sales

Companies have sold a record $794 billion of dollar- denominated investment-grade corporate bonds this year, according to data compiled by Bloomberg. That’s up from $599 billion in the same period last year.

“Prospects for a return to growth in the near term appear good,” Bernanke said in an Aug. 21 speech at the Kansas City Fed’s annual symposium in Jackson Hole. Still, he warned of “critical challenges” ahead and added: “We have an enormous amount of work to do.”

Economists predict the unemployment rate, now 9.4 percent, could climb above 10 percent, curbing consumer spending and limiting the strength of the recovery.

Ben Shalom Bernanke grew up in Dillon, South Carolina, where his family owned a pharmacy opened by his Austrian immigrant grandfather. He went north to Harvard University in Cambridge, Massachusetts, graduating summa cum laude with a bachelor’s degree in economics, then received a doctorate in economics from the neighboring Massachusetts Institute of Technology in 1979.

Great Depression Buff

A self-described “Great Depression buff,” Bernanke joined the central bank as a governor in 2002 after serving as chairman of Princeton University’s economics department. Bush appointed Bernanke chairman of the Council of Economic Advisers in 2005 before naming him a few months later to the top Fed post.

“I did spend a lot of my career studying the Great Depression and other financial crises,” Bernanke said in a town-hall-style meeting on July 26 organized by PBS television. “And I didn’t expect it would be so helpful, so useful, as it has been.”

By his own admission, Bernanke was slow to recognize the severity of the mortgage meltdown at the heart of the recession.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” he said in an interview last November with the New Yorker magazine.

In August 2007, the collapse in credit markets forced Fed policy makers to lower the discount rate just two weeks after declaring inflation was their paramount challenge. The next month, the Fed cut its benchmark federal funds rate for the first time in four years.

Lehman Collapse

Bernanke came under fire for failing to prevent the collapse of Lehman Brothers, which triggered the biggest drop in the S&P 500 Index since Sept. 11, 2001, and deepened the credit freeze.

“The sentiment all over the world was that such a dramatic bankruptcy of a signature institution was impossible,” said Jean-Claude Trichet, president of the European Central Bank, in a June 15 interview.

Bernanke called Lehman’s failure “unavoidable” in his Jackson Hole speech. No buyer could be found, he said, and the investment bank didn’t have enough collateral to qualify for a Fed loan large enough to save it.

Two days after Lehman’s bankruptcy filing, the Fed took control of AIG in an $85 billion bailout designed to prevent the worst financial collapse in history.

Shock Waves

As Lehman’s collapse sent shock waves through financial markets, Bernanke launched unprecedented programs -- one to contain fallout from a run on money-market funds, and another to buy short-term debt from companies such as General Electric Co.

Bernanke also supported then-Treasury Secretary Henry Paulson’s proposal for a $700 billion Troubled Asset Relief Program, initially intended to buy toxic assets from banks and later used to purchases equity stakes in the lenders themselves.

In December, with the economy contracting, the Fed’s key interest rate was slashed almost to zero, where it has remained. In the following months, the Fed launched programs to pump money into the economy through purchases of mortgage-backed debt, U.S. Treasuries and securities backed by auto loans, credit cards and commercial-property mortgages.

“We were at the edge of the abyss,” said Kevin Flanagan, fixed-income strategist at Morgan Stanley Smith Barney in New York. “History will show a lot of the policies the Bernanke Fed employed helped to bring us back.”

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Michael McKee in New York at mmckee@bloomberg.net.

Last Updated: August 24, 2009 22:37 EDT