September 02, 2012
By Pedro Nicolaci da
Costa
JACKSON HOLE, Wyoming (Reuters) - Increasing political
encroachment on the Federal Reserve, particularly from the Republican Party,
could threaten the central bank's hard-won independence and undermine
confidence in the nearly 100-year old institution.
That was the pervasive sentiment among economists gathered
at the Fed's annual monetary policy symposium in Jackson Hole, Wyoming. Against
the dramatic backdrop of the Grand Teton mountains, many said a
closely-contested presidential race has turned the monetary authority into a
political football.
"I do fear for it a bit if the election comes out that
way, especially if some of the more radical voices, that happen to be
Republican voices nowadays, get reelected," said Alan Blinder, Princeton
economics professor and a former Fed vice chairman, adding that historically
opposition to the U.S. central bank had come predominately from the left.
"There's a lot of hostility," said Blinder, who
was appointed to the Fed by former president Bill Clinton.
The primary topic of conversation at the rustic mountainside
resort was whether or not Fed Chairman Ben Bernanke and his colleagues would
deliver another round of monetary stimulus soon.
But, when probed on the issue on the sidelines of the
meeting, many participants voiced concern about the heated political rhetoric
aimed at the Fed, including a bill that would audit the conduct of monetary
policy that is gaining increasing traction among Republicans.
Republican presidential nominee Mitt Romney has said the Fed
should be audited and that he would not reappoint Bernanke, himself a
Republican who was originally picked for the job by George W. Bush, to a third
term when his current one expires in early 2014. Still, he has pledged to
respect central bank independence.
The Fed is already subject to regular audits, but
congressman Ron Paul's bill would remove an exemption for monetary policy
deliberations.
For some observers, that pressure is already affecting the
Fed's behavior, preventing it from pushing more aggressively for stronger
economic growth following the sharp blowback received back in 2010, when
policymakers announced their last large scale bond purchase program.
Some analysts outside the Fed's inner circle -- the ones
that weren't invited to Jackson Hole -- argue top central bank officials
brought some of the political heat on themselves. By backing bank bailouts that
came with few strings attached and allowing some of the chief culprits of the
financial crisis to continue doing business as usual, these critics say, the
Fed was seen as too close to Wall Street, making it an easy political target.
LONE RANGERS
Ironically, the complete political gridlock that
characterizes U.S. fiscal policy has left the Fed in the difficult position of
being "the only game in town."
Both the Fed and the independent Congressional Budget Office
have said a looming "fiscal cliff" of spending cuts and expiring tax
breaks at the end of this year could shove a fragile economy into a new
recession.
In response to the financial crisis and deep recession of
2007-2009, the Fed cut interest rates to effectively zero and bought some $2.3
trillion in government bonds and mortgage debt to keep borrowing costs down and
stimulate investment. Despite such aggressive efforts, growth remains subpar,
registering an annual rate of just 1.7 percent in the second quarter, a level
seen as too tame to bring down the country's 8.3 percent jobless rate.
Bernanke, during his keynote speech here on Friday, spent
much time outlining the benefits of recent Fed policies, arguing they prevented
a much deeper slump and helped put unemployment on a downward trajectory.
But many Republicans in Washington have cried foul, berating
the central bank for risking high inflation in the future -- even if there has
been little sign of substantial upward price pressures from the expansion of
the Fed's balance sheet five years after officials started cutting rates.
Critics also contend the Fed's loose monetary policy has
made it easier for the government to run large deficits.
"Central banks are under a lot of scrutiny right
now," said Karen Dynan, a former Fed economist now at Brookings
Institution. "It's partly because they are using these unconventional
measures that people don't really understand and don't really trust."
Romney's choice of Paul Ryan -- an ardent Fed critic who
supports "sound money" -- as his running mate appeared to ratchet up
the potential for a possible Romney administration to tighten the screws on the
central bank.
Such an attack would most likely come in two forms: support
for Texas libertarian Ron Paul's Audit the Fed bill, which Bernanke has said
would be a "nightmare" for Fed independence, and an attempt to
curtail the Fed's mandate and force it to focus solely on inflation rather than
giving equal weight to unemployment.
Fed officials including Bernanke have warned that monetary
policy cannot go it alone in supporting the economy, and yet there is little
prospect of any resolution to Washington's long-running showdown over fiscal
policy and the budget.
"Monetary policy cannot achieve by itself what a
broader and more balanced set of economic policies might achieve,"
Bernanke said in his Jackson Hole remarks.
UPSIDE DOWN
Historically, the notion of political interference in
monetary affairs boiled down to fears that, if politicians with short-term
horizons had their way, they would always have central bankers crank up the
printing presses in order to juice up growth -- leading, in extreme cases, to
hyperinflation.
In the current case, however, opposition has emerged against
a proactive central bank that has been forced to widen its range of policy
tools in a zero interest rate environment.
Susan Collins, professor of economics at the University of
Michigan's Gerald R. Ford School of Public Policy, stressed the dangers of
political interference in monetary policy of either stripe.
"Compromising that (independence), maybe not
immediately but over the medium- to longer-term, would have some really
unfortunate consequences," said Collins.
These could include a loss of market confidence that
perversely pushes borrowing costs higher and tarnishes the central bank's
credibility.
"I absolutely hope that some wiser council would
prevail should that issue come to the fore," added Collins.
Comments from Romney advisor Martin Feldstein, also
attending the Jackson Hole event, suggested a more Fed-friendly tone could yet
reemerge from Republican side.
Feldstein, a Harvard professor who would likely be on
Romney's short-list to replace Bernanke at the Fed, downplayed the Republican
push to strip the Fed of its dual mandate.
"I don't think that is a realistic idea," he said,
noting that even central banks with single mandates have to pay close attention
to growth and employment. "I don't think the dual mandate has handicapped
them in their focus on keeping inflation down."
