Republicans to the Fed chair: You're not doing your job. Fed chair to Congress: You're not doing yours.
Federal Reserve Chairman Ben Bernanke doesn't care about Capitol Hill or campaign-trail bullies. He has said repeatedly as the central bank has come under a political magnifying glass this year: The Fed bases its decisions on economics, not politics.
On Thursday, the Fed chairman backed up that assertion with action.
The central bank acted boldly this week--about as boldly as it could have, kicking off an open-ended round of bond-buying, extending its commitment to keep short-term interest rates low, and pledging to do even more if the labor market doesn't improve "substantially."
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All this just 54 days before the presidential election.
"We have tried very, very hard--and I think we've been successful at the Federal Reserve--to be nonpartisan and apolitical, to make our decisions based entirely on the state of the economy and the needs of the economy for policy accommodation," Bernanke said at a press conference following the Fed's policy announcement. "We think that's the best way to maintain our independence and maintain the trust of the public," he added.
Politicians have put a lot of pressure on the Fed to do one thing or another this year. GOP presidential nominee Mitt Romney expressed an opinion widely held in his party when said that he didn't think the Fed should start a fresh round of bond-buying, known as quantitative easing or QE3.
"I don't think a massive new QE3 will help the economy," Romney told CNN's Gloria Borger last month. Bernanke is in some ways an unlikely target for conservatives--he is a Republican first appointed to the Fed by President George W. Bush.
This Tuesday, Sen. Bob Corker, R-Tenn., who sits on the Banking Committee, issued a statement urging Bernanke not to launch a third round of bond-buying. "I hope Chairman Bernanke will show humility and make clear there are limits to what monetary policy can achieve," Corker said, adding that QE3 would "only be exacerbating the [economic] problem."
Democrats, too, have urged the Fed toward a particular course, having called on the central bank to do more to help the ailing economy for months. "I would urge you to take whatever actions you think would be most helpful in supporting a stronger economic recovery," Sen. Chuck Schumer, D-N.Y., said to Bernanke in a July hearing.
Economists and analysts have wondered for months how much the Fed is able to shut out the din, particularly as the bank faces threats to the institutional independence that Bernanke so highly values. "The political backlash [among the Fed's Republican critics] that could ensue from a new large round of bond buying may be a restraining factor in the [Fed's] decision," analysts at political risk research and consulting firm Eurasia Group said in a research note in advance of Thursday's announcement.
"The bottom line is that an aggressive Fed move would be walking into political crossfire at exactly the moment when voters are most open to forming new opinions on policy issues," the consulting firm wrote. If Republicans paint the Fed's actions as compensation for President Obama's failed policies--which the Romney campaign has already sought to do--then Bernanke could lose longer-term public support, the Eurasia Group cautioned.
Stepping into the political spotlight through aggressive--and divisive--policy action also carries the risk that the institutional threats the Fed faces will gain wider support. Legislation that would allow Congress to audit the bank's monetary-policy decisions--which Bernanke warned would have a "chilling effect" on the bank's decision-making process--passed the House this summer, 327-98.
Sen. David Vitter, R-La., who supports the Senate version of the Fed-audit legislation, condemned the Fed's actions on Thursday. "Chairman Bernanke and the Federal Open Market Committee are clearly feeling tremendous pressure to bail out the economy because of President Obama's struggle to turn around the jobless numbers," he said in a statement.
"The cost of this open-ended easy money policy dramatically outweighs the short term benefits. The Fed's move today puts us on the fast track to rampant inflation and potentially a return to a world with twenty percent interest rates," he said.
With all the downsides of action, it seems the Fed isn't playing politics--it's looking at the stubbornly high unemployment rate and an already fragile economy that faces potentially dire threats from the European crisis and paralysis in Washington that could send the country over a "fiscal cliff" at year end.
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