Fed independence at risk ... from GOP?
Beyond focus on Bernanke's next moves, Jackson Hole meeting reveals mounting concern about political meddling with the Federal Reserve, especially if some radical Republicans are reelected.
JACKSON HOLE, Wyo.
Increasing political encroachment on the Federal Reserve, particularly from the Republican Party, could threaten the central bank's hard-won independence and undermine confidence in the nearly 100-year old institution.Skip to next paragraph
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That was the pervasive sentiment among economists gathered at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against the dramatic backdrop of the Grand Teton mountain, many said a closely-contested presidential race has turned the monetary authority into a political football.
"I do fear for it a bit if the election comes out that way, especially if some of the more radical voices, that happen to be Republican voices nowadays, get reelected," said Alan Blinder, Princeton economics professor and a former Fed vice chairman, adding that historically opposition to the U.S. central bank had come predominately from the left.
"There's a lot of hostility," said Blinder, who was appointed to the Fed by former president Bill Clinton.
The primary topic of conversation at the rustic mountainside resort was whether or not Fed Chairman Ben Bernanke and his colleagues would deliver another round of monetary stimulus soon.
But, when probed on the issue on the sidelines of the meeting, many participants voiced concern about the heated political rhetoric aimed at the Fed, including a bill that would audit the conduct of monetary policy that is gaining increasing traction among Republicans.
Republican presidential nominee Mitt Romney has said the Fed should be audited and that he would not reappoint Bernanke, himself a Republican who was originally picked for the job by George W. Bush, to a third term when his current one expires in early 2014. Still, he has pledged to respect central bank independence.
The Fed is already subject to regular audits, but congressman Ron Paul's bill would remove an exemption for monetary policy deliberations.
For some observers, that pressure is already affecting the Fed's behavior, preventing it from pushing more aggressively for stronger economic growth following the sharp blowback received back in 2010, when policymakers announced their last large scale bond purchase program.
Some analysts outside the Fed's inner circle -- the ones that weren't invited to Jackson Hole -- argue top central bank officials brought some of the political heat on themselves. By backing bank bailouts that came with few strings attached and allowing some of the chief culprits of the financial crisis to continue doing business as usual, these critics say, the Fed was seen as too close to Wall Street, making it an easy political target.
Ironically, the complete political gridlock that characterizes U.S. fiscal policy has left the Fed in the difficult position of being "the only game in town."
Both the Fed and the independent Congressional Budget Office have said a looming "fiscal cliff" of spending cuts and expiring tax breaks at the end of this year could shove a fragile economy into a new recession.
In response to the financial crisis and deep recession of 2007-2009, the Fed cut interest rates to effectively zero and bought some $2.3 trillion in government bonds and mortgage debt to keep borrowing costs down and stimulate investment. Despite such aggressive efforts, growth remains subpar, registering an annual rate of just 1.7 percent in the second quarter, a level seen as too tame to bring down the country's 8.3 percent jobless rate.
Bernanke, during his keynote speech here on Friday, spent much time outlining the benefits of recent Fed policies, arguing they prevented a much deeper slump and helped put unemployment on a downward trajectory.
But many Republicans in Washington have cried foul, berating the central bank for risking high inflation in the future -- even if there has been little sign of substantial upward price pressures from the expansion of the Fed's balance sheet five years after officials started cutting rates.
Critics also contend the Fed's loose monetary policy has made it easier for the government to run large deficits.
"Central banks are under a lot of scrutiny right now," said Karen Dynan, a former Fed economist now at Brookings Institution. "It's partly because they are using these unconventional measures that people don't really understand and don't really trust."
Romney's choice of Paul Ryan -- an ardent Fed critic who supports "sound money" -- as his running mate appeared to ratchet up the potential for a possible Romney administration to tighten the screws on the central bank.
Such an attack would most likely come in two forms: support for Texas libertarian Ron Paul's Audit the Fed bill, which Bernanke has said would be a "nightmare" for Fed independence, and an attempt to curtail the Fed's mandate and force it to focus solely on inflation rather than giving equal weight to unemployment.