Fed official defends controversial moves after GOP critiques

By Peter Schroeder - 09/26/11 10:38 AM ET

A top Federal Reserve official on Monday mounted a spirited defense of the central bank's recent unconventional moves, less than a week after congressional Republicans said those moves were doing more harm than good.

Sarah Bloom Raskin, a member of the Fed's Board of Governors, said in a speech that the central bank's strong efforts helped control the nation's unemployment and were "completely appropriate" for the time and place.

"There should be no doubt that the [Fed's] forceful actions helped mitigate the consequences of the crisis and thereby spared American families and businesses from even greater pain," she said.

Raskin contends that if the Fed failed to slash interest rates as quickly as it did — from 5.25 percent in mid-2007 to near zero percent by the end of 2008 — the nation's unemployment rate would be several percentage points higher.

"The Federal Reserve saved millions of jobs that would otherwise have been lost," she said in a speech at the University of Maryland Smith School of Business.

Raskin's defense comes less than a week after Congress's top Republicans sent a particularly blunt letter to Fed Chairman Ben Bernanke calling on the central bank to avoid further efforts to stimulate the economy.

“The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated,” the top GOP members from both the House and Senate wrote.

With interest rates as low as they can go for several years now, the Fed has sought increasingly unconventional means to further boost employment and the economy. Those efforts have come under fire, however, from primarily Republicans who argue the moves are devaluing the dollar and having little actual impact.

Nonetheless, the Fed dismissed the GOP plea on Wednesday, when its policy-setting Federal Open Market Committee (FOMC) announced plans to load up on longer-term securities while selling shorter-term ones — yet another attempt to lower rates and spur economic activity.

Raskin argued that the Fed had the right to pursue that move and other unconventional tools. However, she did acknowledge that there is "considerable uncertainty" when it comes to predicting the ultimate outcome of those efforts. The economic impact of previous Fed moves, such as a second round of "quantitative easing," was "somewhat more muted than I might have expected," she said.

Excess supply in the housing market and tight credit conditions for families and small businesses could be limiting the effectiveness of the Fed's work, according to Raskin. She was clear that those headwinds should not be used as an argument for less Fed intervention, though.

"That conclusion should not be taken as implying that additional monetary accommodation would be unhelpful," she said.

She also touched on the fairly high level of dissent that has come out of the FOMC in recent meetings. For the last two meetings, three Fed governors have dissented from the Fed's policy moves — the highest level in nearly two decades.

Raskin, who voted for the moves, dismissed efforts to lump FOMC members into two distinct categories of "hawks" and "doves" who emphasize inflation control or unemployment reduction, respectively. Rather, she argued that all members are equally devoted to both aspects of the Fed's dual mandate.

"When my colleagues and I are doing our job correctly, we are neither hawks nor doves but owls — that is, we are trying to be as wise as possible in deploying all the tools we have to fulfill our legal mandate," she said.