Fed takes action despite Republican opposition

Business Times - 23 Sep 2011


Fed takes action despite Republican opposition

By LEON HADAR
WASHINGTON CORRESPONDENT

ALL signs are suggesting the recovery of the United States economy has been slowing and may be even coming to a halt: the unemployment rate is hovering around 9 per cent; consumer and business confidence is continuing to fall; a political stalemate over fiscal policy in Washington has already brought about a US credit downgrade; and the sovereign debt crisis in Europe is making things worse.

All these problems have put pressure on the US Federal Reserve to do something about the American economy and prevent it from experiencing the dreaded double-dip recession.

Indeed, the International Monetary Fund (IMF) warned that the US could slip back into recession without further fiscal and monetary stimulation. So the Fed will try once again to stimulate the weak economy - that grew at an annual rate of less than one per cent over the first half of the year - by using another monetary policy tool.

This time the central bank is taking steps to put downward pressure on long-term interest rates which (in theory at least) could provide some lift for the struggling housing market.

Fed chairman Ben Bernanke and his colleagues are hoping to do the trick by launching a new US$400 billion programme (AKA 'Operation Twist') under which it will sell shorter-term notes and use the added funds to buy longer-dated Treasuries and add them to its US$2.85 trillion balance sheet.

At the same time, the Fed also plans to reinvest profits from maturing mortgage bonds back into the mortgage market in the hope that such a strategy would help revive the weak sector that has yet to recover from the devastating effects of the financial crisis.

'Recent indicators point to continuing weakness in overall labour market conditions, and the unemployment rate remains elevated,' the Fed said in its statement issued after its policy committee ended two days of deliberations on Wednesday afternoon. The Fed insisted that its new programme 'should put downward pressure on long-term interest rates and help make broader financial conditions more accommodative'.

One of the reasons the markets have invested so much of their hope in the Fed's policy is the perception that the central bank is a respected institution that operates above the fray of the current - and very nasty - political infighting in Washington that has made it less and less likely that the White House and Congressional Republicans would succeed in embracing a fiscal strategy to help re-energise the economy.

But it now seems that Mr Bernanke and the Fed have been drawn into the partisan battles and could even become a major issue in the 2012 presidential and Congressional election campaigns.

Indeed, Republican lawmakers and leading Republican figures who hope to replace President Barack Obama in the White House in 2013, have been trying to 'Obamise' Mr Bernanke by bashing the loose monetary policies embraced by the Fed chairman and by suggesting that these policies are not only ineffective, but that by 'printing money' and putting downward pressure on interest rates, the Fed is creating inflationary pressures and eroding the value of the US dollar.

There is something of an irony in that Mr Bernanke - a conservative Republican economist and disciple of free-market guru Milton Friedman, who was first nominated to his job by ex-president George W Bush - is now being depicted by the Republicans as a political collaborator of the current Democratic president and as a proponent of irresponsible monetary policy.

In fact, all the Republican presidential candidates have promised that if elected they would fire Mr Bernanke from his job. One of these candidates, Republican Texas Governor Rick Perry, went so far as to describe Mr Bernanke's monetary policies as 'treasonous'.

Moreover, in a clear attempt to turn the Fed into a political punching bag, Congressional Republican leaders sent a letter to Mr Bernanke in which they urged him not to launch a new stimulative monetary campaign. 'We have serious concerns that further interventions by the Federal Reserve could exacerbate current problems or further harm the US economy,' the four top Republican leaders in Congress said in their letter.

But it does not look like the Republican tactics have had any effect on the Fed, where Mr Bernanke and the majority of the members of the policy committee have decided that by shifting their bond holdings, they could have a positive stimulative effect on the economy by encouraging mortgage refinancing and creating incentives for investors to buy corporate bonds and stocks.

The move seemed to respond to the recommendation by the IMF that as long as there were no signs of inflation, the Fed should consider easing its monetary policy.

In short, notwithstanding the political pressure from the Republicans, Mr Bernanke has concluded that while he may end up losing his job in 2013, the Fed could not remain on the sidelines of the current economic crisis. He should be commended for his stand.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

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