Fed May Hesitate on More Easing After Critics Question Employment Mandate
The Federal Reserve is facing the fiercest political assault on its powers in three decades as it struggles to help revive the U.S. economy.
The Fed’s plan to expand its purchases of Treasury securities has triggered criticism from Republican lawmakers, some economists who wrote an open letter to the Fed protesting the move, and finance officials in Germany, China and Brazil.
While central bank officials are pressing ahead with the $600 billion bond-buying program announced this month, analysts said the criticism may fan dissent within the Fed over the quantitative-easing policy. That may limit Chairman Ben S. Bernanke’s ability to take further measures if the economy remains weak.
“The Republican economists are reflecting a broad sentiment within the Republican Party, and I don’t think the Fed wants to get into a major confrontation with one of the two parties in Congress,” said Vin Weber, managing partner of the lobbying firm Clark & Weinstock and a former Republican congressman from Minnesota. “It’s not going to kill quantitative easing 2, but it will curtail further easing.”
Democrats say the adverse reaction is about politics, not monetary policy. Alan Blinder, a former Fed vice chairman who once led President Bill Clinton’s Council of Economic Advisers, dismissed charges that the central bank’s step was a “radical departure,” calling it “garden-variety monetary policy.”
Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said he was “appalled” by the Republican attacks. Blaming the complaints on a “very rigid ideology,” he accused Republicans of lining up with China and Germany in opposing the Fed’s credit easing.
In its Nov. 3 statement, the Fed said it intended to buy the securities by the end of June, yet would “adjust” the program if circumstances change. Some analysts said the storm over quantitative easing -- so named because it focuses on changes in the quantity of money the Fed creates through bond purchases rather than changes in interest rates -- could cause the Fed to stop short of the $600 billion mark.
“This is going to just strengthen his internal opposition,” Vincent Reinhart, who directed the Fed’s Monetary Affairs Division from 2001 to 2007, said of Bernanke. “He’s going to have a harder time in the future.”
Reframing the Job
Some Republican lawmakers are talking of rewriting the central bank’s job description. A Fed sidelined by legislation may further restrict the government’s ability to counter the effects of the worst recession since the Great Depression, because lawmakers would likely oppose further fiscal stimulus.
Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said yesterday he favored confining the Fed’s mandate to promoting price stability, though he said that wouldn’t preclude bond purchases by the central bank.
Corker became at least the third Republican in Congress to support trimming the Fed’s responsibilities to eliminate its task of promoting full employment. Other lawmakers include Representative Paul Ryan of Wisconsin, who will head the House Budget Committee in January, and Representative Mike Pence of Indiana, chairman of the House Republican Conference.
Corker, who also suggested that Congress consider setting the Fed’s inflation target, dismissed the notion that either move risked politicizing the central bank.
“We gave the mandate to the Fed in the first place; we could easily change that,” he said. “That’s not politicizing, that’s clarifying more fully what the Fed’s role is.”
Bernanke Defends Plan
Bernanke traveled to Capitol Hill today for a closed-door session with a group of senators to defend the monetary easing. He said the Fed was determined to avoid letting inflation get out of control and said the securities purchases will encourage job growth, lawmakers said.
Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, said Bernanke cited an estimate that the program may help generate 700,000 to 1 million jobs.
Bernanke’s visit came as the four Republican leaders in Congress wrote him to express “deep concerns” over the Fed’s planned bond purchases.
“Such a measure introduces significant uncertainty regarding the future strength of the dollar,” the letter said. The purchases could “result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles.”
The letter was signed by House Republican leader John Boehner of Ohio, House Republican Whip Eric Cantor of Virginia, Senate Republican leader Mitch McConnell of Kentucky, and Senate Republican Whip Jon Kyl of Arizona. A copy was obtained by Bloomberg News.
The unemployment rate is 9.6 percent, and the consumer price index for all items rose 1.1 percent over the 12 months ended in September, the Labor Department said last month.
The Fed’s move was also intended to raise inflation. Expectations of future inflation as measured by government securities of all types are rising. The difference in yields between short- and longer-maturity Treasuries has widened to the most since June. Rates on bonds that protect against rising consumer prices show investors are preparing for an increase.
A group of 23 economists, money managers and former government officials issued an open letter to Bernanke on Nov. 15 saying the central bank’s planned bond purchases “risk currency debasement and inflation” and won’t boost employment. That broadside capped a string of attacks from conservatives including Sarah Palin and Glenn Beck.
Hostility toward the Fed is strong among Republican voters and especially followers of the Tea Party, a loose collection of activists who want to curb government power. Forty-one percent of Republicans and 55 percent of Tea Party supporters believe the Fed should be abolished or radically overhauled, according to a Bloomberg National Poll conducted Oct. 7-10.
The attacks recall previous eras in which Fed policy sparked political opposition such as in the early 1980s when then-Fed Chairman Paul Volcker’s battle against inflation drove the unemployment rate to a postwar high of 10.8 percent. Volcker stood his ground and helped usher in an unprecedented era of price stability and growth.
‘Departure From History’
Earlier episodes of populist criticism of the Fed typically demanded easier monetary policy. This time, the political right wants a tighter policy. That represents a “departure from history,” said Jeffrey Frankel, a professor at Harvard University’s Kennedy School of Government.
The Fed said yesterday it was comfortable with the status quo. “The Federal Reserve is not seeking a change to its statutory mandate,” Fed spokeswoman Michelle Smith said. “The dual mandate is appropriate.”
Eric Rosengren, president of the Federal Reserve Bank of Boston, said shifting to a single mandate wouldn’t have much immediate effect on Fed policy.
“Right now, there’s not a conflict,” he said in an interview. “The unemployment rate is too high and the inflation rate is lower than we expected to see in the long run.”
Still, Federal Reserve Governor Kevin Warsh, who voted for the Treasury purchases, said he’s not sure the quantitative easing will be completed as planned.
“I am less optimistic than some that additional asset purchases will have significant, durable benefits for the real economy,” Warsh said in a Nov. 8 speech in New York. “I consider the FOMC’s action as necessarily limited, circumscribed, and subject to regular review.”
The attack on quantitative easing won endorsements from the presumptive House speaker, John Boehner, whose spokesman Michael Steel said the Republican leader “has grave concerns about the Fed’s recent actions.”
Yet with the White House and Senate in Democratic hands, Fed critics’ ability to exert pressure on the central bank may not go beyond more oversight.
The Republicans have “been trying to politicize the Fed for as long as I can remember,” said Senator Ben Nelson of Nebraska. “This appears to be one more effort.”
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