Democracy in America | Federal Reserve criticism

The Fed and its discontents

The criticism amounts to harmless demagoguery, for now

By P.B.

IN THE wake of Ben Bernanke's media blitz, Republican lawmakers have renewed their attack on the Federal Reserve's dual mandate for both “maximum employment” and “stable prices”. Emboldened by the tea-party movement's auriferous fetish, Republicans Mike Pence and Bob Corker, a representative and a senator respectively, have led the charge to eliminate the Fed's “employment” responsibility. In Mr Pence's words, “It's time that the Fed focus solely on price stability and the dollar.”

Now, I have some sympathy with the idea that central bankers shouldn't be treated as divine experts unfettered by rules and inoculated from democratic accountability. They make far-reaching decisions that, in part, reflect political judgments about which people can disagree. The Republicans' line of attack, however, makes little sense. With unemployment at 9.8% and inflation (excluding food and energy) at just 0.6% in the year to October, it's easer to accuse the Fed of ignoring its employment mandate than vice-versa. More fundamentally, the Fed has long since given up the misguided notion that it can trade a bit of inflation for employment in the long run. As a slightly mystified James Bullard, the president of Federal Reserve Bank of St. Louis, said, “I thought we had clarity on that…the rhetoric that we've used for at least the last 20 years is that we're going to provide a stable price backdrop and let the private sector decide how to allocate resources.” Indeed, the dual mandate certainly didn't stop Paul Volcker from fighting inflation.

The political logic of attacking the Fed, however, is clear. Unelected elitists in Washington make for a nice villain. This is doubly true for moderate Republicans like Mr Corker who need to polish their tea-party bona fides ahead of a potential primary challenge in 2012.

As with any government agency, the Fed's policies deserve scrutiny. But the current criticism seems "confused, hypocritical or ideologically motivated", as we said in our recent leader on the subject. For now this demagoguery is harmless—with core inflation closer to 0% than 2%, critics have little ammunition to support their attacks. But politicising the Fed risks opening the door to future populist protest. QE2 is an abstract issue that incenses political anoraks; let's see what happens if the Fed needs to curtail inflation by raising interest rates while the economy is still stagnant. In that scenario, central bankers could face a backlash for actively destroying jobs and causing unemployment, rather than potentially creating future inflation. Without it's hard-won aura of political impartiality, the technocratic Fed will be much more vulnerable to the ensuing protests and demands of politicians. Even the realistic possibility that the Fed could be affected by such political machinations would dent its inflation-fighting credibility. Given America's populist political structure (compared to, say, the ECB's multiple degrees of separation from voters), the Republicans' scaremongering may be sowing the seeds of real inflation down the line.

(Photo credit: AFP)

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