US Federal Reserve Chairman Ben S Bernanke may find his options for reducing unemployment near a 26-year high are constrained after Republicans take control of the House of Representatives next month.
Representative Ron Paul of Texas, who has advocated abolishing the Fed, will head the committee that oversees it. Representative Darrell Issa of California, who will chair the House Oversight and Government Reform Committee, has said he wants the central bank to be more accountable to the public.
Republicans are gaining clout over the Fed months before policy makers start weighing whether to expand $600 billion of asset purchases to boost the economy — a programme that has aroused the harshest political backlash in three decades. Fed officials are likely to make no change to the stimulus when they meet today in Washington for the last time this year, according to 38 of 39 analysts in a Bloomberg survey on December 7-8.
“They’re clearly not immune from politics,” said former Atlanta Fed research director Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc in Sarasota, Florida. Political pressure will “absolutely” make it more difficult for the Fed to ease further.
“When you’re hemmed in and you’ve found yourself in a hole, stop digging,” he said.
By March or April, central bankers will be moving toward a conclusion about how effective their policy has been and will consider whether to expand their stimulus. Bernanke, in an interview broadcast on December 5, told CBS Corp’s 60 Minutes that the recovery may not be self-sustaining and more purchases of debt beyond the $600 billion approved by the Fed through June are “certainly possible.”
Internal sceptics
Criticism from Congress strengthens the hand of internal sceptics, including Dallas Fed President Richard Fisher and Charles Plosser of Philadelphia, who next month will gain votes on the policy making Federal Open Market Committee (FOMC), said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington.
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“Politics matter,” Reinhart, who directed the Fed’s Monetary Affairs Division from 2001 to 2007, said in a telephone interview. “There’s external criticism and that does empower the internal opposition.”
Michelle Smith, a spokeswoman for the Fed in Washington, declined to comment.
Republican lawmakers have proposed stripping the Fed of its mandate to achieve maximum employment, so it would focus only on inflation. Issa intends to consider whether the five-year lag for release of Fed meeting minutes should be shortened, and Paul said in a Bloomberg Television interview last week that while he won’t “right up front” push for an end to the Fed, “obviously that’s the implication.”
Responding to criticism, Bernanke initiated the broadest review of Fed communications in three years, appointing Vice Chairman Janet Yellen to head a subcommittee to ensure the public is “well informed about monetary policy issues,” according to the minutes of the FOMC’s November meeting.
In a meeting with Issa on December 9, Bernanke pledged to “work cooperatively” to make the Fed more transparent to the public, said Kurt Bardella, Issa’s spokesman. The pressure to curtail monetary stimulus has mounted since Republicans in the mid-term election last month won control of the House.