September 21, 2011
The Republican leadership late Tuesday escalated their assault on efforts to stimulate the economy by warning Federal Reserve Board chairman Benjamin Bernanke to avoid loosening monetary policy until there was “ample data proving a case for economic action.”
The letter, below, signed by House Speaker John Boehner (R-Ohio), House Majority Leader Eric Cantor (R-Va.), Senate Minority Leader Mitch McConnell (R-Ky.) and Senate Minority Whip John Kyl (R-Ariz.), marked a sharp shift from the political standards that have governed U.S. economic policymaking since the 1930s.
Congress and the White House have power over fiscal policy. But the Fed, created as an independent body in 1913, has purview over monetary policy and by law has the twin responsibility to pursue policies that generate both full employment and low inflation. The usual stance of Congress toward the Fed is deference, even when there is sharp disagreement with the central bank’s actions.
But beyond the ritualistic “respectfully” that began several sentences, the letter sent Tuesday represented a sharp shift in tone, lecturing the Fed that “it is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.”
The letter was all the more startling in that it was delivered in the middle of a two-day Federal Reserve Board meeting, with instructions to Bernanke to share its contents with every member of the Federal Open Markets Committee, which sets monetary policy. The FOMC will announce its decision at 2 p.m. Wednesday.
The leadership letter follows charges by the GOP presidential frontrunner, Texas Gov. Rick Perry, that Bernanke actions border on treason, accompanied by intimations of physical violence if the former Princeton professor and a leading scholar on Federal Reserve policy during the Great Depression stepped foot in the Lone Star State.
The move will likely be seized on by Democrats and many mainstream economists to attack Republican irresponsibility in the face of a deteriorating economy. They back further monetary easing to help a struggling U.S. economy, which has slowed to stall speed in recent months.
Others will see it as a deliberate attempt to suppress economic growth heading into next year’s election season. “Now that the GOP has made it all but impossible for fiscal policy to be used to improve the economy, they want to make sure that the only other tool the government has at its disposal -- monetary policy -- isn't used either,” Stan Collender, a long-time federal policy watcher who now works for financial service industry clients at Qorvis Communications, wrote on this blog “Capital Gains and Games” last night. The headline on the blog post: “GOP to Fed: Let Economy Fail.”
It is not unusual for lawmakers to express their views to the Fed chief, who testifies twice a year on Capitol Hill on the state of the economy. Last November, the same group of GOP leaders in a letter to the Fed criticized the central bank’s quantitative easing policy, where it buys Treasury bonds to provide the banking system with liquidity. But that letter came long after the policy had been enacted, not on the eve of a meeting where further easing is under discussion.
The letter’s timing clearly puts Bernanke and the public relations machinery at the Fed in a tough spot. If they decide further easing is not needed at this time, it will look like they’re caving into Republican pressure. But if they feel it is needed, critics will charge the Fed is only acting to preserve its independence, and not on the real state of the economy.
Markets, as always, will play a role in interpreting the Fed’s actions. If the Fed fails to act, and investors conclude that all forms of economic stimulus are now off the table at least through November 2012, perceptions that another recession is in the offing will rise and investors will likely flee stocks when earning drop – which is just about all of them.
Full Text: Republicans’ Letter to Fed Chairman Bernanke :
Dear Chairman Bernanke,
It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.
We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.
Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. 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.
We respectfully request that a copy of this letter be shared with each Member of the Board.
Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor