subject: Could Political Pressure Cause the Fed to Roll Back Quantitative Easing? [print this page] Could Political Pressure Cause the Fed to Roll Back Quantitative Easing?
I don't know if you've noticed, but there is considerable rancor over the second round of quantitative easing from the federal reserve.
It seems as though everyone is getting in on the act. China and Germany have both criticized the program (although for their own selfish reasons), there was this "Open Letter to Ben Bernanke" in the Wall Street Journal on Monday (which was taken down by Paul Krugman here), not to mention the criticism of the Fed's actions by noted economic luminary Sarah Palin.
There is even some talk of removing half of the Fed's dual mandate (of maintaining maximum sustainable employment as well as price stability) so it will only focus on price stability. Rep. Mike Pence (R-IN) plans to introduce legislation to this effect (although according to the linked article, it is unlikely to pass). I dislike the notion that because the Fed has not been able to alleviate the unemployment problem, they should cease trying to do so (although I think fiscal policy would be better at solving unemployment than monetary policy). To me this smacks of political obstructionism, and nothing more.
Yesterday Fed Chairman Ben Bernanke met with Senatorsin a closed-door meeting to defend the proposed program. Sen. Evan Bayh (D-IN) commented:
"[the fed] remain absolutely committed to not letting inflation or inflationary expectations get out of control".
In light of the absolutely anemic growth in yesterday's CPI, I would say we can put a lot of the talk about rampant inflation to bed. The core CPI is up 0.6 percent over the last year. This is "the smallest 12-month increase in the history of the index, which dates to 1957. It seems to me that we are on the verge of deflation. While inflation is certainly very problematic, deflation is at least as dangerous, and it appears to be close to happening now, whereas if inflation were to occur, it would be on the distant horizon.
To be honest, I don't know how to feel about QE2. It is an unprecedented move, and I can see valid arguments for and against QE2. It also seems to me that unprecedented moves may be required in unprecedented times. I am pretty sure that we do not want to lapse into a 1990s-Japan style period of stagnation.
Could political pressure cause the Fed to back down from QE2? I sort of hope not. Not because I feel so strongly about QE2, but because the Fed is supposed to be a body that is insulated from politics (even if this is really only nominally true, it is important). I would rather see monetary policy in the hands of Fed economists (flawed though they may be at times) than in the hands of politicians, who frequently have no economic background, and who are subject to the whims of their constituents and/or lobbyists.
