Fed independence at risk ... from GOP?

Fed officials including Bernanke have warned that monetary policy cannot go it alone in supporting the economy, and yet there is little prospect of any resolution to Washington's long-running showdown over fiscal policy and the budget.

"Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve," Bernanke said in his Jackson Hole remarks.

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Historically, the notion of political interference in monetary affairs boiled down to fears that, if politicians with short-term horizons had their way, they would always have central bankers crank up the printing presses in order to juice up growth -- leading, in extreme cases, to hyperinflation.

In the current case, however, opposition has emerged against a proactive central bank that has been forced to widen its range of policy tools in a zero interest rate environment.

Susan Collins, professor of economics at the University of Michigan's Gerald R. Ford School of Public Policy, stressed the dangers of political interference in monetary policy of either stripe.

"Compromising that (independence), maybe not immediately but over the medium- to longer-term, would have some really unfortunate consequences," said Collins.

These could include a loss of market confidence that perversely pushes borrowing costs higher and tarnishes the central bank's credibility.

"I absolutely hope that some wiser council would prevail should that issue come to the fore," added Collins.

Comments from Romney advisor Martin Feldstein, also attending the Jackson Hole event, suggested a more Fed-friendly tone could yet reemerge from Republican side. Feldstein, a Harvard professor who would likely be on Romney's short-list to replace Bernanke at the Fed, downplayed the Republican push to strip the Fed of its dual mandate.

"I don't think that is a realistic idea," he said, noting that even central banks with single mandates have to pay close attention to growth and employment. "I don't think the dual mandate has handicapped them in their focus on keeping inflation down."

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