As American satirist Peter Finley Dunne’s character Mr. Dooley observed in the 1930s, “The Supreme Court follows the election returns.” The question today is whether the Federal Open Market Committee similarly follows political pressures.
The letter that House Speaker John Boehner, Senate Majority Leader Mitch McConnell and two other top Republican congressional leaders sent to Fed Chairman Ben Bernanke on the eve of this week’s FOMC meeting is without precedent in the 98-year history of the Fed. Economists of both parties find it dangerous.
The letters spelled out the congressional leaders’ opposition to any more stimulus measures by the Fed, stating that, “further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy.”
It is unclear how this letter and recent statements about the Fed and monetary policy by presidential candidates Newt Gingrich and Rick Perry would affect FOMC deliberations, if at all. FOMC members uniformly avow that they never let political considerations or any pressure from elected officials affect their decisions.
But, as Dunne’s satiric Irish saloonkeeper Mr. Dooley observed in the wake of Franklin Roosevelt’s attempt to intimidate the Supreme Court by threatening to “pack” it with additional members, overt political pressures can motivate change even if the principals involved deny it.
That is one of the problems in the Boehner-McConnell letter. Even if the FOMC members hew strictly to the oaths they swore to make the best policy for the nation’s interest, whatever they decide will now be interpreted in light of this congressional letter.
In this week’s meeting, the Fed decided to try to lower long-term rates relative to the short-term ones that the Fed usually tries to control. This is not an interest rate cut or a money supply increase per se. But in coming months, if it does act to further increase the money supply, headlines may read, “Bernanke thumbs nose at Republicans.” If it makes no changes, they may be “FOMC heeds Republican warning.”
Whether either is true makes no difference. The press, the public and global financial markets now all may factor congressional pronouncements into expectations of Fed actions, not only of routine monetary policy decisions, like that of the meeting this week, but also into how the Fed may act in the face of an acute financial crisis.
What is puzzling is that criticizing the Fed is a game both parties routinely play. Whenever the Paul Volcker-led FOMC tightened the money supply to raise interest rates in the early 1980s, dozens of congressional Democrats immediately would issue canned news releases decrying a Fed assault on the citizenry.
Longer ago, Republicans like Congressman Louis McFadden of Pennsylvania and Democrats like Texas’ Wright Patman built entire political careers on demonizing the Fed.
If Boehner and McConnell can instruct the Fed from their positions as Congressional leaders with Republicans in control of the House, then so could Nancy Pelosi, Harry Reid or even Al Franken from a future Congress controlled by Democrats.
One can only wonder if experienced pols like Boehner and McConnell really thought through the implications of tying themselves and, by implication, their party to a specific monetary policy.
Ostensibly, the Fed’s autonomy within the government serves to insulate monetary policy-making from political pressure. But it also insulates Congress from having to take responsibility for making decisions that by their very nature are some of the most unpopular ones any government has to make. The Fed does what otherwise would be very dirty work for Congress.
But when congressional leaders take a public stand in favor a specific policy, as these Republicans did in their letter Monday, they take ownership of that policy.
If events prove that policy was the correct one, yes, then the politicians can bask in the glory of being right. But if the policy turns out badly, they no longer have the plausible deniability created by the Fed’s statutory insulation from Congress.
Throwing away that exemption from political responsibility may reflect bravery. It also may reflect foolhardiness. To do so, one must be very confident of one’s economics as well of as one’s politics.
Yet what the Fed should do right now is not only an issue on which the nation’s best economists are divided, it also is one on which fine economists from both political parties are divided. In recent weeks, Greg Mankiw and Ken Rogoff, both highly regarded economists who are Republicans, came out in favor of greater money creation by the Fed. And if instead the situation were one of Pelosi and Reid coming out against any Fed tightening, they would be shunning the advice of reputable scholars who are Democrats.
Moreover, in a more tawdry consideration, any politician who takes an overt monetary policy stand risks losing the support of wealthy Wall Streeters if that stand is viewed as adverse for financial markets.
Any decision by congressional leaders of either party to directly insert themselves into monetary policy is fraught with economic danger. It is also fraught with political dangers. If repeated, the outcome may be studied and criticized just as long as FDR’s court-packing initiative has been.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.