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Thursday, September 22, 2011
“Today, we really seem to be stuck in a negative spiral”
The Federal Reserve
Take that, Congress
Sep 21st 2011, 19:36 by The Economist online | WASHINGTON
IN THEORY central banks need independence to insulate them from meddling politicians’ demands for easy money. It is a sign of these strange, post-crisis times that the Federal Reserve is now fending off the opposite demand.
On September 20th, as its officials sat down to a two-day policy-setting meeting, they got an unusual letter from the four top Republicans in Congress urging them to “resist further extraordinary intervention in the US economy. [We] have seen no evidence that further monetary stimulus will create jobs.”
If the politicians had hoped to stay the Fed’s hand, they failed. Today, it announced it would purchase $400 billion of Treasury securities maturing in six to 30 years by next June, while selling an equivalent amount with maturities of three years or less. It also said it would maintain its mortgage-related holdings at current levels to support the mortgage market. Three of the ten voting officials dissented, as they did in August when the Fed said it expected to keep short-term rates near zero at least until mid-2013.
Buying long-term bonds by selling shorter-term issues is less aggressive than the Fed’s previous two rounds of “quantitative easing” (QE), in which it bought bonds with newly printed money. But the impact is similar. Lengthening the average maturity of the Fed’s $2.65 trillion portfolio reduces the supply of long-term bonds, nudging down yields.
Politicians have long bashed central bankers. In the 1970s and 1980s Congress men regularly threatened to impeach the Fed chairman. In 1981 one Republican senator told Paul Volcker, the then chairman, “you’re high on the hit parade for lynching.” Democrats, too, have sought to bar hawkish reserve-bank presidents from voting on monetary policy.
But the latest assault differs in several key respects. One is that politicians, especially those from Texas, have historically wanted easier policy from the Fed. By contrast, when Rick Perry, the Texas governor and Republican candidate for president, recently threatened Ben Bernanke, the current chairman, with rough justice, it was for providing just that. This is partly political opportunism: if monetary stimulus worked, the principal political beneficiary would be Barack Obama. But many Republicans genuinely equate Fed bond-buying with reckless government activism leading to rampant inflation.
The second difference is that past critics had a point: Mr Volcker’s tight monetary policy did tank the economy. This time, the hysteria over inflation has no obvious factual basis. Overall inflation has gyrated with petrol prices but is an unremarkable 2% when food and energy costs are excluded. Wage growth and inflation expectations are docile; nominal demand is barely growing.
Third, and most important, historically the Fed’s antagonists came from the fringes of their (usually Democratic) party. Now Republican leaders and presidential candidates are flouting the idea of central-bank independence. That has troubling implications. Mr Bernanke’s term ends in early 2014 and in the unlikely event he wanted another, a Republican president would not grant it. A new chairman in sync with his (or her) philosophy would presumably tighten monetary policy forthwith, the last thing the economy is likely to need.