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Fed risks political fallout from QE3

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By Robin Harding and James Politi in  Washington

The US Federal Reserve was always going to catch a few political bullets if  it launched an  aggressive new easing only eight weeks before a presidential election.

Mitt Romney, the Republican candidate, duly opened fire on Friday after the  Fed began an open-ended third round of quantitative easing (QE3), under which it  will buy $40bn of mortgage-backed securities a month.

In some of the most aggressive comments he has made on the Fed, Mr Romney  said QE3 was nothing but a “sugar high”, and would fail to get the economy  moving.

“Recognise that, as the Federal Reserve keeps on trying to stimulate the  economy by printing more money, that there’s a cost to that,” said Mr Romney in  remarks at a fundraiser.

“The value of your savings goes down. People who are living on fixed incomes  don’t see much interest income any more. And the value of the dollar goes down,  and the risk for long-term inflation goes up.”

The criticism places the central bank in an uncomfortable position because it  is all coming from one direction. Democrats are delighted by the move;  Re­publicans are on the attack.

No matter how apolitical the Fed’s decisions – and chairman Ben Bernanke was  at pains to assert his indifference to politics in a press conference on  Thursday – the Fed’s activism in response to a weak recovery has political  consequences.

The question is whether there are also consequences in the other direction:  whether political debate about the Fed’s actions could result in change to its  mandate or leadership. That remains a more distant prospect.

“What Romney is saying to the Fed is, ‘This is not your job’,” said Phillip  Swagel, a professor at the University of Maryland School of Public Policy and a  former economist for the George W. Bush administration. “QE3 will have a very  modest impact on the economy . . . and if anything it stands in the way of  fiscal policy.”

Some conservative economists think the Fed is over-interpreting the  employment side of the dual mandate – and by lowering interest rates and making  it easier for the US to finance debt in the bond markets, this removes the  pressure from Congress to strike a deal on deficit reduction.

The most visible effort to clip the Fed’s wings is a bill introduced in the  House of Representatives by Kevin Brady, a Republican from Texas, who is  vice-chair of the Joint Economic Committee of Congress. His bill would limit the  central bank’s mandate  to inflation, not employment, and restrict its monetary policy operations to  short-term Treasury securities.

Were his bill now law, Mr Brady told the Financial Times, “the Fed would not  be able to embark on this third round of quantitative easing”. He said the bill  had taken off faster than he had hoped and already had 48 co-sponsors in  Congress. “Everyone, whether they agree or not, believes it is the right time to  have this discussion.”

In depth

US  elections 2012

staff fixes the presidential seal before US President Barack Obama gives a press conference

Republican candidate Mitt Romney takes on President Barack Obama in the race  for the White House

But while Mr Romney has criticised QE3, it would be a huge leap to eliminate  the employment mandate once in office. “I think you can do a lot without changes  to the Federal Reserve Act,” says Prof Swagel. “Romney will probably look to  appoint the next Fed chair as someone who is aligned with his views.”

That is the most realistic political consequence of the Fed’s actions: that  when Mr Bernanke’s term expires at the end of January 2014, a new chairman is  appointed who opposes them.

Once settled in the White House, however, even Mr Romney would have to  consider whether a tight monetary policy was actually in his interest, given  that re-election would probably depend on delivering strong economic growth.

Whether QE3 has any lasting political consequences for the Fed will probably  depend on how well it works. “It puts critics of the Fed in a difficult  position,” said John Makin, a resident scholar at the American Enterprise  Institute in Washington, who called the programme of open-ended easing a “bold  experiment”.

The Fed is trying to bring down  high unemployment and, while the experiment is in progress, critics will  struggle to make headway. If the experiment fails, however, and inflation rises  sharply before unemployment comes down, the Fed may find itself hard-pressed to  resist the proposals of Mr Brady and his  colleagues.

Entry #77

Comments

1.
Comment by bobbya - September 16, 2012, 2:42 pm
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The Republican AND CONservative Nightmare Continues---A Black Man as POTUS for 4 More Years!

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