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GOP sees Fed move as a ploy in the election
Question of the Day
The Federal Reserve took aggressive action Thursday to try to reinvigorate the economy and generate more jobs, announcing a major program of purchasing $40 billion a month in mortgage bonds that it hopes will drive down interest rates to record lows and spur faster growth.
Financial markets rallied strongly in response, with the Dow Jones industrial average soaring by 207 points to end at the highest level since December 2007. Gold, oil and other commodity prices also rose on the Fed’s move, which the central bank contends is needed to carry out its mandate to restore full employment in the U.S. economy.
The unusual election-year stimulus campaign did stir political controversy, however, and was opposed by Republicans, some of whom accused the Fed of trying to get President Obama re-elected.
With the unemployment rate still hovering above 8 percent, he said, the Fed must act because Congress has been unwilling to provide more stimulus to the sluggish economy or resolve uncertainties over major budget cuts and tax increases scheduled to take effect at the end of the year — a possibility he said is overshadowing the economy and holding back growth.
“The employment situation remains a grave concern,” Mr. Bernanke said, stressing that the central bank wants to promote job growth and help stimulate home sales and values with its move to purchase mortgage bonds backed by Fannie Mae and Freddie Mac.
He predicted the action will help increase confidence among businesses and consumers and, as home and stock prices rise, foster a sense of growing wealth that will make people more willing to spend.
Republicans dubbed the move futile.
“I’m disappointed in the Federal Reserve’s actions today and truly believe Chairman Bernanke is beginning to do serious damage to the Fed as an institution” by inserting itself into the political crossfire, said Sen. Bob Corker, Tennessee Republican and leading member of the Senate Banking Committee.
“Open-ended purchases of mortgage-backed securities will politicize the Fed and add substantially to its balance sheet risks, but it will not help our economy’s long-term growth prospects. Business leaders all over the country tell me that economic growth is being impaired by public policy uncertainty — mostly driven by the implications of our massive debt — not by a lack of cheap money.”
While most criticism of the Fed in the past has come from liberals demanding more cuts in interest rates, this year it is Republicans who have mounted a major attack on the Fed, demanding tighter policies that would lead to higher interest rates.
Republican presidential nominee Mitt Romney has vowed to replace Mr. Bernanke when his term expires in 2014, and the GOP included provisions in its platform to study a return to the gold standard, which is opposed by the Fed. The platform also called for requiring the Fed’s interest rate decisions to be closely monitored by a congressional watchdog — a move Mr. Bernanke contends would seriously threaten its independence.
“We should be creating wealth, not printing dollars,” said Lanhee Chen, policy director for Romney for President. “After four years of stagnant growth, falling incomes, rising costs and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures.”
In the face of such criticism and the suggestion he is trying to boost Mr. Obama’s re-election prospects, Mr. Bernanke emphatically denied that there was any political motive or consideration in the decision.
“We have tried very hard to be nonpartisan and apolitical,” he said. “Our decisions are based on the needs of the economy. That’s the best way to maintain our independence and maintain the trust of the public.”
Mr. Bernanke said the Fed action is not a “cure-all” for the economy and action still is needed by Congress to address the so-called “fiscal cliff” of expiring tax cuts at the end of the year and to bring down budget deficits over the long term to avert a debt crisis.
“Monetary policy is not a panacea. We’re looking for other policymakers to do their part,” he said. “We’ll do our part, but we can’t solve this problem by ourselves.”
Brian Gardner, Washington analyst at Keefe, Bruyette and Woods, said Republicans may discover a downside to their aggressive assault this year on Mr. Bernanke, whose loose money policies have been a big elixir on Wall
Street as much of the money the Fed is pouring into the economy has ended up in the stock market.
Markets reacted ebulliently Thursday, with the Dow clearing 13,500 for the first time since the beginning of the Great Recession and landing at 13,540, within 625 points of its all-time high. The Standard & Poor’s 500 index also soared to its highest level since 2007.
Conservative members of the Fed also have waged an internal battle against further easing. But while vocal in raising their objections, they appear to be in a distinct minority. Thursday’s decision drew one lone dissenter — Jeffrey Lacker, the hawkish president of the Federal Reserve Bank of Richmond.
Action by the Fed was enthusiastically welcomed on Wall Street.
“The Federal Reserve is speaking loudly and carrying a big stick,” said Ryan Sweet, senior economist at Moody’s Analytics, who noted that the Fed pulled out a bigger arsenal of weapons to fight the economic torpor than most economists expected.
Besides instituting an open-ended program to buy mortgage bonds, which coupled with ongoing investment programs will bring the total of monthly Fed long-term bond purchases to $85 billion, the Fed also said it will keep its target for short-term interests near zero through mid-2015.
Also in a major change, the Fed clearly indicated that these latest measures will continue until it sees significant improvement in the job market, where job growth of a little more than 100,000 a month on average has not been sufficient to reduce the unemployment rate to normal levels or put back to work millions of people idled by the recession.
“It’s an aggressive step — making future monetary easing contingent on the health of the job market,” Mr. Sweet said. While some economists question how effective the latest moves will be, given that interest rates already are at or near record lows, Mr. Sweet was optimistic it will help the economy.
Previous Fed bond-purchase programs “successfully lifted the economy before,” and raised the economy’s output by an estimated 1.2 percent, he said. “While we would expect to see diminishing returns from future quantitative easing, it is likely to add a few tenths of a percentage point” to economic growth this year, he said.
“By focusing on mortgages, the Fed is attempting to jump-start the housing market” in particular, Mr. Sweet said. “Housing has shown signs of life recently but the improvement has been gradual and uneven.” While the connection with the job market is “blurry,” he said, the Fed move should help spur employment in construction, the industry hit hardest by the recession.
Some observers are skeptical, however, that the central bank can do much more to prod the economy to grow faster.
While the Fed came through with an impressive display of force, it “is unlikely to have any perceptible impact on the labor market and the U.S. economy in general,” said Harm Bandholz, an economist at Unicredit Markets.
“The much bigger issue right now is the fiscal cliff, which adds to the already high uncertainty about the economic outlook. As a result, businesses are delaying investment expenditures and are more cautious about hiring.”
Michael P. Lebowitz, an analyst at Absolute Investment Management, said he was “shocked” by the Fed’s decision and said that the rise in oil, gold and other commodities is signaling concerns about an uptick in inflation as the Fed prints money to purchase more bonds.
“Our biggest concern is that increases in money supply always lead to inflation,” he said. “This is detrimental to the lower and middle class, as well as those in emerging and developing countries who spend a large portion of their income on food and energy.”
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
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