Practical Economics


GOP Hopefuls Put Federal Reserve on Edge

Art Pine

With monetary policy now a campaign issue, Fed policymakers are finding many enemies, few friends.



Criticism of the Federal Reserve by the leading GOP presidential candidates is going to make it even tougher for the Fed to take effective action to aid the economy before the 2012 election.

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Texas Governor Rick Perry’s recent charge that another round of credit easing would be “almost treasonous” was broadly criticized as intemperate, but almost all the GOP presidential hopefuls are targeting the central bank for censure. And the salvos will continue, no matter which of the Republican rivals emerges as the front-runner.

Shortly after Perry launched his barrage, Republican hopefuls Mitt Romney and Sarah Palin endorsed the Texan’s denigration of the central bank. Perry’s views, if not his tone, are shared widely by GOP leaders — even those who aren’t linked to the Tea Party, whose members have been especially outspoken about Fed policy.

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Besides fearing that the central bank’s credit-easing policies will spur inflation, Republicans also see an opportunity to drag the Fed into their criticism of President Obama’s now-unpopular economic stimulus program. The Fed’s performance won’t be a major issue by itself, but it’s certain to come up throughout the campaign.

The GOP onslaught won’t have a major impact on the central bank’s ability to function, but it comes at a moment when the Fed’s power to affect the economy is limited. As Chairman Ben Bernanke pointed out in a speech August 26, Fed policymakers have only a few modest options left to help spur the economy, after two rounds of “quantitative easing” through bond purchases and with short-term interest rates as low as they can go. Both Bernanke and his board are reluctant to take those last-resort steps now.

Bernanke himself all but dismissed the GOP attacks. In his speech last week, he declared the Fed would still be open to considering modest new stimulus measures — if the situation deteriorated. And he chided the White House and Congress for becoming so involved in political brinkmanship that they have failed to adopt rational fiscal policies.

But the political assault may make the Fed hesitant about more steps, from buying longer-term Treasury securities (to push long-term interest rates down) to setting a higher inflation target, which would enable the Fed to adopt new stimulus measures. Growing public criticism also could erode the financial markets’ confidence in the central bank.

Indeed, the Fed’s policymaking body, the Federal Open Market Committee, is itself divided on whether the Fed should do any more to spur lending. Bernanke says he is willing to act only if the economy worsens. The panel will review the situation at its scheduled meeting in September, now expanded to two days.

Tensions between the Fed and the nation’s political leaders aren’t new. The central bank takes pride in being independent — and indeed has often been the government’s lone inflation fighter, tightening credit policies when the White House and Congress have gone on spending sprees.

Fed chairmen often have acquiesced to — or even accommodated — the economic policies of a sitting president, even when they haven’t fully agreed with him. Arthur Burns, a Republican who headed the central bank during the Nixon administration, eased credit before the 1972 presidential election, in part to help re-elect the president.

In 1960, supporters of Democratic presidential candidate John Kennedy tried publicly to get Fed chairman William McChesney Martin to resign, but Martin refused. Lawmakers often have blamed the Fed for economic problems, but money and credit policies rarely have made it into national campaigns.

This is the first time in recent memory that the Fed’s performance has become an issue in a presidential campaign. Even during the 1980s, when then-Chairman Paul Volcker pushed the economy into recession to help combat a virulent inflation rate, newly elected President Ronald Reagan backed Volcker to the hilt. Republicans believe Fed policies haven’t been effective, and could have bad consequences. GOP candidates believe the Fed has been too easy, keeping interest rates near zero and buying bank-held Treasury securities to spur banks to lend more. But banks haven’t been lending. Republicans also fear the easy-money policies will exacerbate inflation.

So far, few have come to the central bank’s defense. Karl Rove lambasted Perry’s threat to the Fed, but that could have come partly from the long-time rivalry between Perry and Rove’s old boss, former President George W. Bush.

Democrats, already under fire because Obama’s broader stimulus program hasn’t succeeded in spurring more growth and creating new jobs, aren’t in a position to ward off disparagement of the central bank. With a voter backlash looming against Obama’s policies, few Democratic stalwarts have been urging the Fed to ease credit further.

Even so, the full impact of the GOP criticism may not be evident for months. If the Fed does announce some new steps after its September meeting, they’re bound to be modest. Fed policymakers may take pride in their independence, but they aren’t blind to political pressure.



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