Unwelcome attention

Congress threatens the central bank’s independence

Published on The Economist, by staff, July 16, 2009.

… Since 2008 the Fed has lent to firms previously ineligible for its credit and bought up government bonds with newly printed money. Although almost certainly saving the economy from an even worse mess than it is now in, those actions have reawakened a long-dormant streak of scepticism towards the central bank. Americans and Congress are upset about reckless bankers, failed regulators and bail-outs. The Fed makes a proxy for all three. 

The unease cuts across party lines. Mr Paul is a conservative Republican, but a third of his co-sponsors are Democrats. The sponsor of the Senate’s version of the bill is the only socialist in Congress, Bernie Sanders of Vermont. Republicans fiercely oppose Barack Obama’s proposal that the Fed should oversee the largest, most systemically important financial firms; they think it would compromise the Fed’s attention to low inflation. Democrats who shrink from criticising their own president can attack the Fed over bank bail-outs.

Mr Paul’s bill is unlikely to become law. The Democratic leadership does not support it and few senators have signed on. But it may affect Congress’s appetite for expanding the Fed’s powers as much as Mr Obama would like. The Fed could face restrictions on its emergency lending authority or be required to disclose more about its lending operations. (It has already boosted disclosure and allowed more GAO scrutiny.) Less likely, but more serious, its structure could be revamped: the role of private bankers may be reduced or reserve bank presidents may need Senate confirmation.

Whatever the outcome, the increased scrutiny has unpleasant implications for the Fed, argues Tom Gallagher of ISI Group, a broking firm. It suggests diminished, though still favourable, odds that Ben Bernanke will be reappointed as the Fed’s chairman when his term ends on January 31st next year; greater caution by the Fed in using its balance-sheet to prop up the financial system; and more doubt about whether the Fed will be able to tighten monetary policy soon enough in the face of political resistance … (full text).

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