Federal Reserve Chairman Ben S. Bernanke went to Capitol Hill on Wednesday to defend himself against the latest assault by Republicans on the Fed’s loose money policies.
Behind closed doors, he told lawmakers that Fed studies show its program to buy nearly all the U.S. Treasury’s debt in the next eight months will help create 700,000 jobs, according to meeting participants.
But that did little to appease GOP leaders who are alarmed about the Fed’s latest move into uncharted territory, with some vowing to change the Fed’s statutory mandate so it focuses only on preventing inflation in the future instead of trying to lower unemployment.
Sen. Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking, Housing and Urban Affairs Committee, said after meeting with Mr. Bernanke that he still has “concerns about the risks associated with the Feds actions,” specifically, that they will cause a “devaluation of the dollar and high inflation.”
If the Fed plan backfires by igniting an inflationary spiral, that would “greatly exacerbate our current economic difficulties,” Mr. Shelby said.
But he was sympathetic with the Fed’s conviction that it had to do something to prevent a double-dip recession, and said the central bank felt it had no choice in light of the gridlock and regulatory ferver gripping Congress and the White House.
“The bottom line is that the Fed is attempting to spur job growth because the Obama administration has done so much to inhibit it,” Mr. Shelby said.
“The anti-growth policies of the Obama administration have paralyzed American businesses through red tape and uncertainty. Businesses will not create jobs unless they can reasonably determine what the associated costs will be.”
Other top Republicans are not so forgiving of the central bank’s intentions and are formulating plans to try to prevent the Fed from taking unconventional steps to try to lower the unemployment rate.
“The Federal Reserve should focus exclusively on price stability and protecting the dollar,” said House Republican Conference Chairman Mike Pence of Indiana, author of legislation to narrow the Fed’s mission, which he plans to push in the next Congress when Republicans control the House.
“We cant print money as a pathway to prosperity,” he said, contending that it is Congress’ job - not the Fed’s - to spur hiring by providing tax cuts and regulatory relief to businesses.
Sen. Bob Corker, Tennessee Republican, who co-sponsored Mr. Pence’s bill in the Senate, said he reluctantly came to the conclusion that the Fed’s mission must be changed after much thought and a private discussion with Mr. Bernanke on the matter Monday.
But he said Congress also is at fault for forcing the Fed to the point of taking extreme measures. Congress allowed the federal debt and deficits to explode without any attempt to curb them in recent years, and that debt is now tying Congress’ hands and preventing it from enacting additional aid for the economy.
“I understand my colleagues concerns about the Federal Reserve monetizing our debt, but ultimately, the best way for us to counter that is for Congress to act responsibly and put in place appropriate disciplines that rein in our hugely out-of-control spending,” Mr. Corker said.
U.S. Chamber of Commerce President Thomas J. Donohue joined Republicans in blaming the Democrat-controlled Congress and White House for heavy regulatory policies that he said have stifled economic growth and job creation.
But he also warned forcefully against interfering with the Fed’s attempts to revive the economy and putting political pressure on the independent central bank.
The Fed provides a “unique strength” to the U.S. economy compared with the central banks of many of the U.S.’s main competitors, he said, and part of that strength is the Fed’s focus on job creation as part of its mission.
“We must maintain the independence of the Fed and be very careful not to louse that up on Capitol Hill,” he said.
Democratic legislators and the White House have largely stayed out of the fight. President Obama defended the Fed’s actions when he was traveling in India last week, in an unusual departure from the White House’s policy of not commenting on the Fed to avoid any political interference.
Moreover, Democrats strongly support the Fed’s dual focus on employment and inflation, contending both are important for a healthy economy.
The Fed’s so-called dual mandate was enacted in 1977 when Democrats controlled Congress. But it has been the subject of much criticism and debate over the years as to whether it discourages the Fed from acting vigorously to pre-empt inflation.
Most other central banks have only one mission: To slay inflation. The European Central Bank, for example, has kept interest rates consistently higher than the Fed as it single-mindedly pursues its mission to hold down prices, while the Fed has adopted looser policies to try to stoke faster growth.