Bloomberg News

Undermining Bernanke Stirs Republicans Joining Fed Insiders

October 18, 2011

(Adds Bernanke speech today in fifth paragraph.)

Oct. 18 (Bloomberg) -- The U.S. Federal Reserve is under more pressure than at any point in three decades over Chairman Ben S. Bernanke’s efforts to jumpstart the economy, and the criticism threatens to undermine support for the central bank.

Mitt Romney, once a Bernanke defender, now says he would replace him, as have Herman Cain, Newt Gingrich and other Republican presidential contenders. Republican congressional leaders have urged the chairman to “resist” further action. And even some Fed presidents came out against the central bank’s recent attempts to lower long-term interest rates.

“If you think of the Fed’s reputation, that is its key political asset,” said Sarah Binder, a senior fellow of governance studies at the Brookings Institution in Washington. “All of these criticisms leave a mark over time.”

Some lawmakers and economists say the U.S. central bank shares the blame because it failed to build a consensus for its unprecedented activism. The Fed’s own internal divisions were underscored by three reserve bank presidents dissenting at each of the last two meetings, the most since 1992.

And Fed officials are looking for ways to explain their policies in greater detail, minutes of their September meeting show. Bernanke said in a speech today at the Boston Fed’s economic conference that the central bank “continues to explore ways to further increase transparency.”

‘Enormous Powers’

In less than three months, Fed policy makers have taken two significant new steps to lower rates. In August, they said they would hold the short-term rate at about zero for at least two years; last month they announced a $400 billion shift of their $2.6 trillion securities portfolio into longer-term debt.

They also made an unusual move back into what economists call credit policy, or support for a specific segment of the economy, by deciding to reinvest maturing mortgage and housing agency debt back into their $871 billion mortgage-backed securities portfolio.

Brad Miller, a North Carolina Democrat and member of the House Financial Services Committee, said the “suspicion” already lurking among Democrats and Republicans at the ideological extremes was compounded by Bernanke’s activism because the Fed supported specific banks, securities firms and financial markets without first bringing Congress and the public on board during the credit crisis.

The Fed “exercised enormous powers without Congress having boo to say about it, or the American people through their political system having anything to say about it,” Miller said.

Reason for Skepticism

The Republican criticism has come from the top. Last month, lawmakers including House Speaker John Boehner and Senate Minority Leader Mitch McConnell urged Bernanke in a letter to refrain from further monetary stimulus, “particularly without a clear articulation of the goals of such a policy” and “ample data proving a case for economic action.” Americans, they said, “have reason to be skeptical” of his plans.

Romney, a former Massachusetts governor, was a supporter of Bernanke as recently as April 12 when he told MSNBC that the Fed chairman is “doing as good as job as he thinks he can do.”

At a Sept. 7 candidates’ debate, Romney said he would seek a new chairman because Bernanke “has overinflated the amount of currency that he’s created.” The Fed’s second round of so- called quantitative easing “did not work, it did not get Americans back to work,” Romney said.

Cain, who has led in some polls in the Republican presidential race, said at an Oct. 11 debate sponsored by Bloomberg News and the Washington Post that he didn’t “agree with the actions that have been undertaken by Ben Bernanke” and has new candidates in mind when his term is up.

Auditing the Fed

Texas Republican Representative Ron Paul, another presidential candidate, for years has called for audits of the Fed’s monetary policy decisions. And Texas Governor Rick Perry said in August that things could get “ugly” for Bernanke in his state if he tried additional monetary stimulus.

“I do not recall there being a period of time when the Fed had fewer friends in Washington,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “The general public is not happy with what has gone on in Washington,” either.

U.S. Representative John Campbell, a California Republican on Congress’s Joint Economic Committee, said the Fed is an easy scapegoat when the economy isn’t performing well.

“It’s a nice place for people in elected office to turn to shoulder some of the blame so that we don’t shoulder it all,” Campbell said.

Not Since Volcker

Not since the Fed under Paul Volcker’s leadership raised interest rates to as high as 20 percent in 1980 and 1981 has a chairman been such a political target.

Democrats in Congress at the time threatened legislation to force the Fed to lower rates. Homebuilders enraged by the recession sent Volcker protest letters penned on lumber. At one point, so many two-by-fours were stacked in the corridor outside Volcker’s office that an aide complained of a sore arm from moving them “to make room for more,” said Douglas Lee, a former economist for Congress who now runs Economics from Washington, which provides analysis to institutional investors.

Alan Blinder, a former Fed vice chairman, said that while the latest protests are unlikely to force the central bank to change course, they can’t be ignored.

“I doubt very much the Fed has pulled its punches” because of the criticism, said Blinder, who teaches economics at Princeton University. Still, “the danger is there” that political pressure could have an impact because the central bank “is a creation of Congress.”

Criticism From Within

Unlike Volcker’s efforts to halt inflation, Bernanke’s bond purchases and changes in communication and portfolio maturity are aimed at boosting the economy so some of the 14 million unemployed can find jobs. The Fed’s portfolio shift in September helped push 30-year mortgage rates down to a record-low 3.94 percent on Oct. 6, and yields on U.S. 10-year notes to a record- low of 1.67 percent on Sept. 23. Yields on the 10-year Treasury notes stood at 2.13 percent at 1:52 p.m. in New York.

Still, when the three Fed Bank presidents dissented in the August and September Federal Open Market Committee meetings they said the Fed should hold its fire. They continue to criticize the Fed’s policies now.

“The actions taken in August and September risk undermining the Fed’s credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery,” Philadelphia Fed President Charles Plosser, who dissented at both meetings, said during an Oct. 12 speech. “It is my assessment that they will not.”

Curbing Dissension

In response to the dissents, Representative Barney Frank, the House Financial Services panel’s top Democrat, wants to curb the voting power of some Fed presidents. Frank said in a Sept. 12 memo published on the panel minority’s website that the Fed presidents had “become a significant constraint on national economic policy making.” Frank has introduced legislation eliminating their role as voting members of the FOMC.

One reason Fed policy makers aren’t winning more popular support is they haven’t followed their moves with detailed explanations of how their forecasts have changed or what they intend to achieve, said Mark Calabria, director of financial- regulation studies at the libertarian Cato Institute in Washington.

“They haven’t laid out a game plan; they haven’t been consistent,” said Calabria, a former senior Republican staff member at the Senate Banking Committee. “It is not even clear that they thought through any of this in a very deep way.”

More Press Conferences

Before the August and September policy moves, the last economic outlook the public had from the FOMC was from June, when they were calling for growth this year of 2.5 percent to 3 percent -- about one percentage point higher than what economists are forecasting now.

An investor searching for a rationale for the two-year zero-rate pledge in August would come across this sentence in the meeting minutes: “While all felt that monetary policy could not completely address the various strains on the economy, most members thought that it could contribute importantly to better outcomes in terms of the committee’s dual mandate of maximum employment and price stability.”

To be sure, Bernanke now holds press conferences four times a year. He has also appeared before Congress 11 times this year. The burden of explaining actions is higher with unconventional policies and intervention in specific segments of the economy, economists said.

“If you are doing something in the private sector that favors one sector against another, that is a political matter,” said Marvin Goodfriend, a former Richmond Fed policy adviser who is now a Carnegie Mellon University economist. “There is bound to be conflict with fiscal policy makers.”

--Editors: Mark McQuillan, Robin Meszoly

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; James Rowley in Washington at jarowley@bloomberg.net.


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