Fed politics: the congressional heat on the U.S. central bank is about to intensify.

AuthorBenjamin, Matthew

An enduring consequence of the Federal Reserve's unconventional policy response to the financial crisis and ensuing recession is the intensifying congressional scrutiny now focused on the U.S. central bank. That scrutiny has manifested in a concerted, ongoing congressional campaign to thoroughly examine and "reform" the Fed and its policies, a campaign poised to strengthen as incoming Chair Janet Yellen and her colleagues continue to focus on maximizing employment in the wake of quiescent inflation.

Since the Fed's robust response to the crisis, antipathy toward the institution has become considerably deeper and more pervasive, particularly on the U.S. political right. Politicians associated with the upstart Tea Party movement in particular--as well as many establishment Republicans--believe the Fed has strayed too far from its initial objective of controlling the money supply.

The list of complaints about the Fed is lengthy:

* It has attempted, primarily through its large-scale asset purchase program, to compensate for a lack of fiscal stimulus through credit allocation to a specific sector (housing through purchases of mortgage-backed securities).

* Its Treasury purchases enable and encourage irresponsible borrow-and-spend fiscal policies.

* Its low-interest-rate stance creates asset bubbles and favors Wall Street and other economic elites over ordinary savers and retirees for whom interest on savings is an important source of income.

* Its money creation to finance bond purchases risks higher future inflation as well as an erosion of the value of the dollar.

* Its asset purchase program is having unintended and deleterious consequences in developing nations.

* Its dual pursuit of the sometimes contradictory goals of maximum employment and stable prices renders the Fed ineffective and in fact leads to lower employment and higher interest rates.

* Its policymaking is undemocratic in that it is neither fully transparent nor well understood by ordinary citizens.

As a result of these problems, perceived or actual, there is now broad-based enthusiasm among Capitol Hill Republicans for a significant overhaul--sometimes labeled a "modernization"--of the Fed to equip it for the twenty-first century.

Central to the various legislative proposals is a fundamental alteration of the Fed's mandate, restricting it to price stability (within a framework of overall economic stability) while jettisoning the goal of maximum employment. The justification for...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT