Don't Expect Fireworks from the Fed


Congress Dems may ask tough questions, but Bernanke has learned to hold his tongue. Plus, he has little choice but to stick to current policy

As Sherlock Holmes observed, sometimes what's important is the dog that didn't bark in the night. On Jan. 18, Federal Reserve Chairman Ben Bernanke will appear before the Democratic-run Congress for the first time when he meets with the Senate Budget Committee. The committee is chaired by Kent Conrad, a Democrat from North Dakota, who said last year that the previous Republican Congress was leaving behind "a litany of failure" on economic and other issues. Some experts expect the Democrats to be more forceful in their questioning of the Fed chairman, particularly on housing and wages, than the previous Republican congressional leaders.

But expect no big news from Bernanke. Both for philosophical and pragmatic reasons, the Fed chairman is not interested in getting into a big debate with the Democrats over monetary policy or fiscal policy. After a few early missteps—notably his off-the-cuff discussion of interest rates with CNBC reporter and BusinessWeek columnist Maria Bartiromo at a dinner—Bernanke has gotten better at keeping a low profile (see BusinessWeek.com, 05/04/06, "Chairman Bernanke's Clarity Issue"). He sees his job as closer to being a technician rather than a charismatic figure like his predecessor, Alan Greenspan, who regularly had long intellectual debates with his Congressional questioners.

To be sure, the Democrats may ask Bernanke why he isn't cutting short-term interest rates. "The economy is clearly slowing down, and we have a new Congress and a new chairman," says David Wyss, chief economist at Standard & Poor's, which like BusinessWeek is part of The McGraw-Hill Companies. (MHP). "They will not be bestowing laurels."

No Effect on Long-Term Rates

Still, the Democrats also have very little ammunition with which to sway Bernanke from his current policies. The overall unemployment rate is only 4.5%, below what most economists would consider to be full employment. The 8.4% unemployment rate for blacks is at its lowest level since 2001. And the 2.3% gain in real hourly wages for nonsupervisory and production workers over the past three months is the strongest since 1972.

Perhaps most important, the 10-year interest rate is just under 4.8%, barely above where it was when the Fed first started raising short-term rates in June, 2004. In other words, the Fed's monetary policy, designed to slow the economy, has had virtually no effect on long-term rates at all. Instead, long rates have been held down by a flood of money coming in from China and elsewhere.

In fact, the Democrats may be making a mistake focusing their attention on Bernanke. No one is calling the Fed Chairman "the most powerful man in Washington," the phrase often applied to Greenspan. These days, that moniker may be better suited to Zhou Xiaochuan, the governor of the People's Bank of China.

Mandel is chief economist for BusinessWeek .

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