Republicans are concerned about the Federal Reserve, but have yet to nail down a cohesive message on what, if anything, should be done with the central bank.
Two weeks after the Fed announced it would begin buying up $600 billion of long-term Treasury bonds in an effort to stimulate job growth, key GOP lawmakers have aired their worries about the action, warning it could devalue the dollar and lead to inflation.
Some Republicans want to change the Fed’s mandate to focus solely on inflation and not maintaining maximum employment. Others worry the independence of the central bank is at risk because of the increased political debate centering around its actions, which has been driven in part by groups on the left and the right.
“This is not a particularly good time for legislators to be suggesting changes in the Fed’s approach,” said one monetary policy expert at a conservative think tank. “Everyone thinks they can suddenly become a monetary policy expert.”
Financial markets and business groups are leery of the
criticism from Capitol Hill.
U.S. Chamber of Commerce President Tom Donohue this week expressed hope for the success of the Fed’s efforts, and warned: “We must maintain the independence of the Fed and be very careful not to louse that up on Capitol Hill.”
Some have speculated that political pressure could cause the Fed to shut down its second round of quantitative easing (QE2), the name given for the asset-purchasing by the Fed that is supposed to spur investments in the economy.
But Federal Reserve Chairman Ben Bernanke on Friday defended the purchasing decision, saying the Fed “seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.”
The pressure on the Fed from the right in part reflects grass roots Tea Party groups that helped the GOP take over the House and close the gap in the Senate. The Tea Party movement has long been suspicious of the Federal Reserve, and the addition of Tea Party-supported candidates in Congress was expected to increase scrutiny of the central bank.
“Republican politicians for the most part know that touching the Fed is stupid,” said Joseph Gagnon, a senior fellow at the Peter G. Petersen Institute for International Finance. “But they want to appear responsive to that vocal minority, because those people are usually Republicans.”
In that effort, lawmakers have yet to center around a consistent message.
On Tuesday, Sen. Bob Corker (R-Tenn.) and Rep. Mike Pence (R-Ind.) announced they were introducing legislation that would repeal the dual mandate of the Fed that requires it to pursue policies that both maximize employment and minimize inflation. Instead, the central bank should focus exclusively on keeping inflation down, they said.
But even Corker and Pence disagreed on how aggressively the Fed should be tacked.
Pence came out swinging, saying when the Fed “unilaterally” announced its new spending, which he said was “at odds with the goals of the American people” and after a “historic rejection of American liberalism and the borrowing and the spending and the bailout agenda of the recent past.”
“Printing money is no substitute for sound fiscal policy,” he added.
Corker opted a much more restrained tone, saying he merely wanted to provide clarity to the Fed’s mission and maintained that, while concerned about QE2, the legislation was not in response to it.
“None of us really will know, until we look in the rearview mirror [after] these policies have played themselves out as to whether these were good or bad policies,” he said of the Fed’s most recent actions.
He even opened his remarks by noting that he and Pence do not have the same outlook on the matter. “We end up in the same place, but coming from different perspectives,” he said.
Republican leaders have taken a cautious approach to the
Incoming Speaker John Boehner (R-Ohio), Senate Republican Leader Mitch McConnell (R-Ky.) Senate GOP Whip Jon Kyl (R-Ariz.) and House Republican Whip Eric Cantor (R-Va.) wrote to Bernanke on Wednesday to air their “deep concerns” about the Fed’s QE2 decision.
While the four leaders said the Fed's actions created "significant uncertainty" and did not help restore confidence in the U.S. economy, they opened the letter by saying that the Fed “must be free and independent from political pressures.”
They also said the Fed “should be open to receiving input
and data from a wide range of sources.”
The conservative monetary policy expert said the mixed
messages are in large part due to the complexity of the Fed’s actions. Even
lawmakers like Corker who come from a business background and sit on the Senate
panel with jurisdiction over the Fed may not be experts on monetary policy.
“Almost everyone commenting on the subject doesn’t have a clue what QE2 is,” he said, adding that the political response to the Fed’s efforts has been “all over the map” for Democrats and Republicans alike.