In a rare attempt to intervene in the policymaking of an independent agency, the four top Republicans in the House and Senate wrote a letter to Federal Reserve Chair Ben Bernanke, warning him against further steps to use monetary policy to boost the struggling US economy.
The group, which included the top two Republicans in both houses of Congress, said the Fed’s policies have been ineffective at supporting economic expansion and boosting employment.
“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate,” the group said in a letter to Fed Chairman Ben Bernanke.
The letter was signed by House Speaker John Boehner, Majority Leader Eric Cantor, Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl [...]
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” the letter said.
The Fed has a mandate given to it by Congress to promote both maximum employment and price stability. Congressional Republicans are basically asking Bernanke to violate that statute. If they don’t want the Fed intervening in the economy, they could pass a law changing the mandate. But they’d rather jawbone and try to influence an independent agency in an effort to stall monetary policy during a jobs crisis, just as they have stalled fiscal policy.
I wish I could say this was the first time any politicians have ever petitioned the Federal Reserve and tried to dictate their policies, but sadly, it happened with little fanfare just a year ago. The same four lawmakers – Boehner, Cantor, McConnell and Kyl — wrote the Fed in November 2010, albeit with a little trepidation, saying that they believed “monetary policy must be free and independent from political pressure,” and that they were just giving input and data.
But that letter came after the announcement of the second round of “quantitative easing” (QE2), which sought to lower long-term interest rate, and was mainly an expression of concern. Yesterday’s ominous warning against monetary intervention comes on the eve of an announcement by the Fed, expected today at 2:15 pm ET, on their next steps on the economy. It is widely expected the Fed will announce “Operation Twist,” an effort to rebalance their portfolio with long-term rather than short-term bonds, again attempting to lower long-term rates. They may announce more.
So the GOP letter is a naked attempt to forestall that prospect, or at least to get Fed Chairman Bernanke, who often desires consensus thinking about the consequences of Fed actions. None of the caveats about how “monetary policy must be free and independent from political pressure” are present in the new letter.
Robert Reich explains the double-bind this letter puts on the Fed:
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose trust in the nation’s monetary policies. … And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. The inevitable result: Lenders charge more for lending us money.
The letter puts Bernanke and his colleagues in a huge bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.
I don’t know about the global investor effect, but it’s true that letters like this politicize the Fed. The Fed deserves more criticism and more people speaking out about its policies. That includes politicians, who are entitled to their opinions. But when Congressional Republicans do it in this manner, and specifically warn against expansionary policies, it moves away from the realm of criticism and into the realm of angling for the economy to fail, to gain a political advantage in the next election.