Fed Up
Republicans may not like it, but the law says the Federal Reserve can do whatever it wants.
Posted Wednesday, Sept. 21, 2011, at 6:33 PM ET
Here is how the Federal Reserve Board of Governors tells Republicans to shut up:"Longer-term inflation expectations have remained stable."
Bam!
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability."
Pow!
Steven Wright wishes he could deadpan like this. In a short statement that surprised few and pleased fewer, the Fed announced that it would purchase $400 billion of treasury securities. It reminded gawkers that it's going to keep printing money to stimulate the economy. That's what other central bankers are doing, and that's what the Fed will do. Inflation isn't a worry. The health of the economy, amid the slow, staggering collapse of confidence in Europe, is a worry.
Can this work? If it does, it slightly lowers long-term interest rates, and some people take advantage of that to spend more money. Daniel Gross describes this as "adding a drop to a full pitcher of water," and that's not too cynical. But according to one economics-forecasting firm, the Fed's move could create—sorry, could inspire hard-working Americans to create—as many as 350,000 jobs.
So why did the Fed's move make Republicans so angry? On Monday, the GOP's leaders in the House and Senate sent a letter to Chairman Ben Bernanke asking the Fed to "resist further extraordinary intervention in the U.S. economy." The reason: They didn't think the previous rounds of quantitative easing had worked. Also, "there had been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress, and the public."
They really should have stopped before rattling off those last two. The Federal Reserve Act of 1913, as amended by both parties, created an independent central bank that could operate outside of politics—i.e., it could do things frowned upon by Congress and the public. The act, as amended in 1977, commands the Fed to promote "the goals of maximum employment, stable prices, and moderate long-term interest rates." The message going out from Mitch McConnell, John Boehner, Jon Kyl, and Eric Cantor was: Don't do as you're told.
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"You don't want to turn over monetary policy to the whims of political and maybe even populist views of the time," says Tony Fratto, a spokesman for the Treasury Department in the George W. Bush administration. "This criticism from Republicans is way off-base. I think it's evidence of some misunderstanding of the Fed's statutory mandate."
It might be a misunderstanding, or it might just be a flat-out rejection. I'm guessing it's the latter. My evidence: The words coming out of every leading Republican's mouth for the past few months.
For convenience's sake, start the story with Rick Perry. The week after he started running for president, he said that "printing more money to play politics at this particular time in American history is almost treacherous—or treasonous." Outraged Republican voters swarmed over to Perry and boosted him to a double-digit poll lead in their primary. Four weeks later, when the candidates debated in Tampa, they one-upped each other and Perry.
"They should be a sound-money Federal Reserve," said Rick Santorum. "That should be their single charter, and that is it." Herman Cain, who once served on the Kansas City Fed's board of governors, agreed with that: "The Fed did its job when it was singularly focused on sound money." Michele Bachmann raised the specter of Nazism by calling TARP "enabling act legislation" and dreamed of a Fed "shrunk back down to such a tight leash that they're going to squeak."
These were some of the least-discussed moments in the debate. No surprise: Republican orthodoxy on the Fed has been moving to the right with sound-barrier-busting speed. And why wouldn't it be? In Fed Up!, his little white book of political musings, Perry argued that "the Federal Reserve's monetary policy of extremely low interest rates over a long period of time" was one of the pressure pumps inflating the housing bubble. That's true. It was.
Still, it's quite a leap from "the Fed's made mistakes" to "the Fed shouldn't try to boost employment because some people are against it." The best argument for the Boehner/McConnell/Perry position—at this point, we can safely call it "the Republican position"—was probably made by John B. Taylor. "Until very recently," Taylor found, "policy statements and directives from the Fed didn't explicitly mention the 'maximum employment' part of the dual mandate in the Federal Reserve Act. The committee's members preferred to emphasize the goal of price stability and its role in creating strong economic and employment growth."
All true, but how does it relate to the problems of the Great Recession? In previous downturns, like 1980-82 or 1991-92, interest rates were higher and inflation was a greater concern. The Fed says inflation is manageable. Republicans say it's such an incipient problem that the Fed needs to tear up its plans and keep it under control. But there just isn't any evidence that inflation is looming The primal fear of a weak dollar—something no politician claims to favor—is what's behind this Republican demand to fix a nonexistent problem.
The reaction to the GOP letter was angry. The reaction to Perry's comments was even angrier. From a political standpoint, this is probably good for Republicans, because they're on the record against a policy that can't do much to boost the economy, and that bet's worked well for them in the Obama era. It might be good for Democrats to understand how deep and existential, and radical, the GOP's critique of the Fed really is. For the Fed, it's a wash. Read the law. It can do whatever it wants.
