Bernanke Policy Options May Be Limited Amid Republican Scrutiny
Federal Reserve Chairman Ben S. Bernanke may find his options for reducing unemployment near a 26-year high are constrained after Republicans take control of the House of Representatives next month.
Representative Ron Paul of Texas, who has advocated abolishing the Fed, will head the committee that oversees it. Representative Darrell Issa of California, who will chair the House Oversight and Government Reform Committee, has said he wants the central bank to be more accountable to the public.
Republicans are gaining clout over the Fed months before policy makers start weighing whether to expand $600 billion of asset purchases to boost the economy -- a program that has aroused the harshest political backlash in three decades. Fed officials meeting today in Washington for the last time this year are likely to make no change to the stimulus, according to 38 of 39 analysts in a Bloomberg survey Dec. 7-8.
“They’re clearly not immune from politics,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Sarasota, Florida. Political pressure will “absolutely” make it more difficult for the Fed to ease further.
“When you’re hemmed in and you’ve found yourself in a hole, stop digging,” he said.
By March or April, central bankers will be moving toward a conclusion about how effective their policy has been and will consider whether to expand their stimulus. Bernanke, in an interview broadcast Dec. 5, told CBS Corp.’s “60 Minutes” that the recovery may not be self-sustaining and more purchases of debt beyond the $600 billion approved by the Fed through June are “certainly possible.”
Criticism from Congress strengthens the hand of internal skeptics, including Dallas Fed President Richard Fisher and Charles Plosser of Philadelphia, who next month will gain votes on the policy making Federal Open Market Committee, said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington.
“Politics matter,” Reinhart, who directed the Fed’s Monetary Affairs Division from 2001 to 2007, said in a telephone interview. “There’s external criticism and that does empower the internal opposition.”
Michelle Smith, a spokeswoman for the Fed in Washington, declined to comment.
Republican lawmakers have proposed stripping the Fed of its mandate to achieve maximum employment, so it would focus only on inflation. Issa intends to consider whether the five-year lag for release of Fed meeting minutes should be shortened, and Paul said in a Bloomberg Television interview last week that while he won’t “right up front” push for an end to the Fed, “obviously that’s the implication.”
Responding to criticism, Bernanke, 57, initiated the broadest review of Fed communications in three years, appointing Vice Chairman Janet Yellen to head a subcommittee to ensure the public is “well informed about monetary policy issues,” according to the minutes of the FOMC’s November meeting.
In a meeting with Issa on Dec. 9, Bernanke pledged to “work cooperatively” to make the Fed more transparent to the public, said Kurt Bardella, Issa’s spokesman.
The pressure to curtail monetary stimulus has mounted since Republicans in the mid-term election last month won control of the House. John Boehner of Ohio, the prospective House speaker, and three other top Republicans in Congress expressed “deep concerns” about the asset purchases, also known as quantitative easing, in a Nov. 17 letter to Bernanke. The program may create asset-price bubbles and weaken the dollar, they said.
So far, quantitative easing has shown mixed signs of meeting the goals of reducing interest rates and spurring growth. Since the announced the program on Nov. 3, the yield on the benchmark 10-year Treasury note has climbed to 3.28 percent from 2.57 percent.
“It’s a strategy which fights against itself,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “The point of doing this was to get rates lower, and if you do something that is viewed as helping the economy or raising inflation expectations, that would presumably logically be pushing rates higher at the margin.”
Inflation expectations for the next five years, as measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.61 percent yesterday from 1.44 percent on Nov. 3. IntercontinentalExchange Inc.’s Dollar Index, which measures the currency’s performance against six trading partners, has climbed 3.7 percent, confounding critics who said asset purchases would weaken the currency.
Paul expressed concern last week that the central bank won’t be able to avert an acceleration of inflation. He also said he plans to “push for debating” whether the Fed should focus solely on policies that promote price stability.
The Fed, created by Congress in 1913, operates as an independent, non-partisan institution. The political backlash is “very problematic” because it damages confidence in monetary policy and injects concerns Congress will impose “crazy restrictions” on the central bank, said Mark Gertler, a professor of economics at New York University.
Goldman Sachs Group Inc. economists led by Jan Hatzius said in a Nov. 19 report that the Fed was unlikely to complete the New York-based firm’s earlier estimate of $2 trillion in asset purchases in part because the political “backlash probably does increase the hurdle for additional purchases.”
Aftershocks from the worst recession since the Great Depression, including an unemployment rate stuck at 9.4 percent or higher since May 2009, have intensified hostility toward the Fed, said Gertler, who has conducted research with Bernanke on how financial crises can worsen downturns.
“What’s different now is how long the economic turmoil has been prolonged, and that makes it difficult for anyone to operate above partisan politics,” Gertler said.
A majority of Americans are dissatisfied with the U.S. central bank, saying the Fed should either be brought under tighter political control or abolished outright, according to a Bloomberg National Poll conducted Dec. 4-7.
An agreement to extend Bush-era tax cuts for two years may take some pressure off the Fed to increase stimulus by boosting economic growth. The $858 billion agreement between President Barack Obama and Republican lawmakers, which would also cut payroll taxes and extend unemployment benefits next year, was advanced in the Senate yesterday.
Some signs from the economy suggest the recovery is sustainable, casting doubt on the need for the Fed to expand its balance sheet.
Retail sales rose more than forecast in November as holiday shopping got under way, Commerce Department figures showed today. Customers snapped up discounts at chains like Target Corp. and Macy’s Inc. during the Thanksgiving weekend, the traditional kick-off to the busiest sales season of the year. Other reports this week may show industrial production and homebuilding rebounded, while the cost of living held steady.
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