Senate panel OKs Diamond for Fed, prospects cloudy

By Rachelle Younglai

WASHINGTON (Reuters) - A Senate panel on Thursday approved for the third time the nomination of Nobel laureate Peter Diamond to a seat on the Federal Reserve Board over the opposition of Republicans, setting up a tough fight to win approval in the full Senate.

The Senate Banking Committee backed Diamond twice last year, but the nomination was blocked by the panel's top Republican, Richard Shelby. The committee vote on Thursday was 12-10, with all the support coming from Democrats.

Shelby's continued opposition, and the lack of support from other Republicans, means it will take a willful exercise of political muscle from the White House and Senate Democratic leadership to push Diamond's nomination through.

In the Senate, a single member can hold up a nomination.

Senate Majority Leader Harry Reid could seek to overcome Shelby's roadblock by mustering a 60 vote super-majority, but he would have to gain some Republican support and may need to expend precious legislative time and political capital.

The Democrats control the Senate by a 53-47 margin.

Shelby said Diamond, an MIT professor who has written about pensions and behavioral economics, lacked the needed expertise and would come at the job from the wrong ideological perspective.

"The Fed's responsibilities cut across three broad areas -- conducting monetary policy, supervising our financial system and responding to financial crises," the Alabama Republican said. "He does not have experience in any of these areas. In addition, I believe he is an old-fashioned, big government Keynesian."

The normally seven-member Fed board, which is at the heart of U.S. monetary policy-making, has two vacancies. It faces the possibility of another empty seat when Governor Elizabeth Duke reaches the end of her term in January.

Board terms are for 14 years, although Diamond was nominated to fill out an unexpired term that runs through January 2014.

At a confirmation hearing earlier this year, Diamond said the central bank's $600 billion bond-buying program has been an effective tool and he played down concerns about inflation.

"The issue is, going forward, are there signs that inflation might be picking up quickly?" he said in response to questions from lawmakers. "I view commodity prices as driven by micro factors, not general stimulation of the economy."

Republican Senator Mike Johanns of Nebraska, the only Republican still on the committee to have supported Diamond last year, announced on Wednesday that he would oppose the nominee based on his backing of spending and stimulus measures.

"We must be increasingly wary of the threat of inflation, yet the Fed continues to print money with reckless abandon," Johanns said.

With the Fed still associated with Wall Street and financial industry rescue missions, Diamond's nomination may not be the battle Democrats chose to wage as the political parties stake out their positions before the 2012 elections.

(Additional reporting by Mark Felsenthal; writing by Mark Felsenthal and Tim Ahmann; Editing by Neil Stempleman)