Monetary Policy

The headline above is not what GOP congressional leaders actually said today to Federal Reserve Board Chairman Ben Bernanke, but they might just as well have used that precise language in the letter CNBC reports they sent to the Fed.  According to CNBC, the letter instructed the Fed "to refrain from further 'intervention' in the economy.

In other words, now that the GOP has made it all but impossible for fiscal policy to be used to improve they economy, they want to make sure that the only other tool the government has at its disposal -- monetary policy -- isn't used either. 

Why take on the Fed?  The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority.  Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving.

The fact that a number of prominent Republican economists and political strategists today severely criticized the Federal Reserve for the quantitative easing it announced two weeks ago was anything but a surprise. 

Here's what I said would happen in a post from this past August: 

No, it's not the ocean liner. It's the Fed's second massive asset purchase, this time $600 billion of longer term Treasury bonds ($75 billion per month over the next eight months), just announced this afternoon. QE2 stands for "quantitative easing 2." QE1 was the Fed's somewhat forced purchase of $1.75 trillion of mortgage-backed securities during the depths of the financial crisis. Dropping interest rates to zero wasn't enough to avert the complete seizure of the lifeblood of the economy, its financial system, so the Fed put a lot of dollars in the hands of those financial institutions holding impaired housing assets. This Fed study found that it worked. Now that the economy is growing too slowly to lower the unemployment rate, and inflation remains low, the Fed decided today that QE2 was necessary to get more growth.

Over at Economist's View, Mark Thoma comments on a piece by Joseph Stiglitz from Monday's Financial Times that questions the value of using monetary rather than fiscal policy to deal with the economy.  Stiglitz makes a number of very good points (you can almost hear the frustration in his writing), but he quickly goes past what I see as the money quote:

The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting.

Obviously there's no way to know for sure whether the Fed is waiting until the mid-terms are over to take the steps it has been increasingly hinting it would take or whether the fact that its next meeting just conveniently and coincidentally end the day after America goes to the polls. But Mark Thoma seems to think it could be intentional.