The Fed, in Trying Not to Be Political, Is Political

The central bank tries to stay out of the spotlight
Eric Rosengren, president of the Federal Reserve Bank of Boston, speaks at the Institute of International Bankers annual conference in Washington, D.C. Photograph by Brendan Hoffman/Bloomberg

The Federal Reserve doesn’t want anyone to think it’s taking sides in politics. So in an election year, the Fed is more likely to stand pat. It’s less likely to raise rates if that’s what’s needed, or to cut rates if a rate cut is what’s required.

But here’s the problem: The harder the Fed tries to avoid politics—the elephant in the room—the more it allows political thinking to infect its mission. A truly apolitical Fed would do whatever is the right thing for the economy and resolutely ignore the second-guessers in both parties.

Eric Rosengren, president of the Federal Reserve Bank of Boston, who favors more aggressive action by the Fed to raise growth and lower unemployment, made the case for a truly apolitical Fed in an interview with the Boston Globe published today. “We don’t get to pick the timing of a global slowdown,” Rosengren told the Globe. “If there’s a slowdown and you have an independent central bank, the appropriate response is to act. I think that’s exactly what we should do.”

Rosengren did not go quite as far as the Boston Globe story implied—that is, he did not specifically mention election-year pressures. The Globe writers, Steven Syre and Andrew Caffrey, paraphrased Rosengren as saying that the Fed should not worry if further easing is seen as influencing the presidential election. I wrote to them for clarification and Syre responded that “Rosengren’s quote was his response to a question about any potential political controversy around a fed stimulus vote two months before an election.” So it was the reporters who brought up politics, not Rosengren himself. That might seem like a small point, but in the arcane world of Fed politics, it matters. Tim Duy, a University of Oregon economist who blogs on Fed policy, told the Globe, “to pull back the curtain and say, ‘They’re doing this for the election,’ I think is a shift and reflects his level of frustration.” That’s an overstatement of what Rosengren said.

Still, the frustration among doves is real. I wrote this week’s Bloomberg Businessweek cover story on Ben Bernanke. In it, I quoted economist Paul Krugman as saying on his New York Times blog, “We have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.”

Vincent Reinhart, the chief U.S. economist of Morgan Stanley, whom I interviewed for the Bernanke cover, made a study of Fed decision-making in election years and concluded that the central bank’s bias was not toward being too loose or too tight but simply toward not doing very much at all. “It will tend to choose operations that are smaller and time them to keep out of scrutiny,” Reinhart told me. “This particular year, a higher hurdle for action means you delay doing more accommodation. Hence, it looks biased.”

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