The surprise political maelstrom this fall isn’t about tax cuts or Don’t Ask Don’t Tell. It’s about the Federal Reserve's unorthodox effort to pump life into the economy, and it has sent Congressional Republicans and conservative economists into a rage.
Why? Because the Fed's move to print money and buy up $600 billion in Treasury bonds --nicknamed "QE 2" -- has heightened suspicions among many conservatives that the perhaps-too-independent central bank might be carrying water for for the Obama administration and for big-spending economic policies.
GOP lawmakers, wanna-be presidential contenders, and a well-organized group of right-leaning economists screamed out in oppostion at Fed policies all week long. The attackers, among many others, included Sarah Palin, House Speaker-to-be John Boehner and Senate GOP Leader Mitch McConnnell. Though the Fed has plenty of critics on the left, the rebellion of the last few weeks has been overwhelmingly one of Republicans and tea partiers. The Fed's new easing policy, they warned, will spark runaway inflation, undercut the dollar and reduce America’s clout in dealing with China.
Prominent Republicans in the House and Senate are now promoting legislation that would strip the Fed of half its mandate – the part about pursuing full employment – and order it to focus only on preventing inflation. The bill and the increasingly shrill criticism have clearly alarmed Fed officials, who began their own campaign of speeches and interviews to defend themselves.
But on many levels, the GOP criticism seems baffling. Inflation is hovering at a 50-year low. Financial markets appeared to welcome the move; if anything, Wall Street analysts fretted that the Fed still wasn't doing enough to stoke demand. Perhaps most importantly, as Bernanke noted in a speech on Friday at a central banking conference in Frankfurt, the U.S. economic recovery is still rumbling along at a snail's pace.
John Taylor,a professor of economics at Stanford University and a former deputy Treasury secretary under President George W. Bush, said the criticism "is due to the fact that QE2 is so different from normal monetary policy and raises risks with little benefit." Taylor, the leading academic critic of the easy-money policies under the Fed chairmanships of both Alan Greenspan and Ben Bernanke, was among the economists who took out newspaper ads this week to argue for a policy reversal.
But on a political level, Republicans are annoyed that Bernanke continues to call for more fiscal stimulus and has imlicitly supported the direction of President Obama's policies. Republicans have made it their top priority to slash government spending and whatever stimulus money hasn't yet been spent.
Fundamentally, Republican critics reject the diagnosis – from liberal economists, Obama’s team and Bernanke – that flagging demand is holding back growth. Conservatives say the biggest hindrance to growth is uncertainty over new regulations and the possibility of higher taxes, which has kept businesses from hiring and the economy from expanding more quickly.
For the GOP, any other stance would look hypocritical – if you concede the economy needs a new dose of consumer spending power, it’s hard to argue now is the time to slash government spending. The more Bernanke and Co. contradict that, the grumpier Republicans get.
Bernanke’s comments on fiscal policy, a prominent conservative economist speaking on condition of anonymity said Friday, are "not creating any real warm and fuzzies between the R’s and the Fed.” More bluntly, the economist said, “There is some political belief that the Fed is underpinning the administration.”
Conservatives have always viewed Fed independence more skeptically than liberals, the economist noted. That’s especially true for a Tea Party crowd – who can forget New Hampshire crowds serenading Rep. Ron Paul (R-Tex.) with chants of “End the Fed!” in 2008? – that is flexing its muscle in GOP circles after the election.
For now at least, the GOP move to limit Fed authority appears to have little chance of passing Congress. It may not have to. Some analysts worry that the criticism has already chilled any chance of further monetary stimulus from the Fed, regardless of what the economy needs. Meanwhile, the Tea Party has a new litmus test for 2012 – and so far, most of the major contenders are passing it.
jtankersley@nationaljournal.com or Twitter: @jimtankersley
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