At Jackson Hole, a growing fear for Fed independence
http://www.chemnet.com Sep 03,2012 Reuters
"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.
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.
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."