James Pethokoukis

Politics and policy from inside Washington

Sink the Fed’s dual mandate and QE2

Nov 18, 2010 16:23 UTC

Multitasking is hard, even for the Federal Reserve. But by law — yet another horrible policy relic of the 1970s – it has to promote both “maximum employment” and “stable prices.” Some Republicans think it better that the Fed, like its European Central Bank counterpart, focus solely on prices getting neither too hot nor too cold. And an effort by Representative Mike Pence of Indiana and Senator Bob Corker of Tennessee is just the start of a GOP push to roll back Team Bernanke’s vast authority.

A just-offered bill by Pence would simply strike the bit about jobs from the Federal Reserve Act. The casus belli is part procedural, part economic. Corker and Pence say the Fed’s attempt to boost the economy by buying bonds usurps the proper fiscal role of Congress and the president. It also risks devaluing the dollar and boosting inflation.

The political context is clear. The opaque, unelected Fed is wildly unpopular with Republicans, particularly those of the Tea Party variety. They blame its interest rate policy for the housing and bank busts. And Bernanke is seen as an enabler of the hated bank bailouts and explosion in government spending under President Barack Obama. Tea Party support would be helpful to Pence if he decides to run for higher office, as he is supposedly considering.

Corker, on the other hand, is just trying to keep his current job. His efforts to forge a compromise with Democrats on financial reform made him enemies on the right where some folks already doubted his conservative bona fides. So clipping the Fed might just help him avoid a Tea Party primary challenge if he runs for reelection in 2012.

But the gentlemen also know the effort makes for sound economics. The existence of the dual mandate is a big reason why the Fed has launched its bond-buying QE2 plan, a triple-bank shot effort to artificially boost jobs by lowering interest rates,  weakening  the dollar (and boosting exports) and lifting stocks (and creating a wealth effect). Now the Fed knows QE2 will make it that much tougher to eventually shrink its balance sheet — thus risking higher inflation —  but feels it has no choice since Congress and the president are unlikely to agree on new, pro-growth fiscal policies. Of course, Fed action also eases the pressure on Washington to act. So instead of cutting taxes to empower business and allow consumer to repair their personal balance sheets, the Fed’s bubble machine gets restarted.

A Republican would have to nab the presidency that year for the Corker-Pence idea to become law. Democrats love the dual mandate and wish the Fed were doing even more to boost jobs. They expanded the Fed’s mandate in 1978 as a way of forcing the central bank to print money. But thankfully things have not worked out that way. The 1980s combo of hard-money Paul Volcker and tax-cutting Ronald Reagan created a low-inflation, high-growth economy that has produced 50 million net new jobs during the past generation.

But the dual mandate gives ample authority and justification for an easy-money Fed chairman to run the presses, particularly is he’s under political pressure to do so. Now Democrats may argue that a mandate change would tie the Fed’s hands in a financial crisis. A Fed chief could easily cite price stability as justification for setting up lending facilities as Bernanke did in 2008 and 2009. After all, U.S. prices fell sharply during the worst of the 2008 downturn. Indeed, one possible future GOP pick to run the Fed doubts whether such rule would limit his policy actions. If Republicans take the White House in two years, he just may find out.


While you make some valid points, there are a couple of statements that are incorrect.

While many republicans do agree with the majority of the Tea Party ideals, ie smaller government, lower taxes, the ones that have even the slightest clue about world financial markets do not hate the Fed. In fact, they understand its crucial role in the world economy. To go even further, those with economics and finance degrees understood the importance of bailing out the banks during the crisis.

The other problem with the editorial is the mention of inflation. Where is it? It doesn’t exist. Energy and fuel prices may have ticked up a bit but you should know that they are volatile components of the pricing indexes. Inflation isn’t a real concern until the slack, unemployment and excess industrial capacity, are taken out of the system. We know that is a long way off.

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Bernanke probably agrees with the anti-QE2 letter

Nov 15, 2010 15:32 UTC

A bunch of right-of-center investors, economists and journalists (under the banner of the great e21 group) have signed an open letter to Ben Bernanke:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

A few thoughts here:

1. I have no doubt that Bernanke would prefer not to be doing QE2, either. I think his preference, like those who signed the letter, would be for more fiscal action accompanied by a long-range deficit reduction plan. But, seeing that is not likely to happen, he is using what tools he has.

2. In most countries where the central banks are politicized, the pressure is to running the printing presses. In America, it’s just the opposite — at least from conservatives.

3. Is there any chance that Bernanke gets a third-term? Almost certainly not if a Republican wins the presidency in 2012.


The American gov’t and the Obama administration above all need to provide CERTAINTY for American businesspeople. Even if its bad certainty, there must be certainty so businesspeople can start planning and investing again. No one knows how the healthcare bill will ultimately impact business or even if it will ever get implemented. No one knows if or when the gov’t will stop its regulatory binge. When will they finally make a decision on taxes? Other things are beyond the President’s control, like a bottoming of the housing market, but he can still send some signals. Obama seems too fixated on his long-term social(ist) agenda to realize that the country needs some fundamental leadership on a day-to-day basis. Pres. Bush would have by now established a few (decidedly simple) guiding principles, giving the American people something to hold onto, i.e. CERTAINTY. The economic equivalent of “you’re with us or your against us.”

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Arguing for deflation

Oct 20, 2010 13:41 UTC

Ed Yardeni gives it a try:

Why is  [Bill Dudley of the Federal Reserve]  so sure that the Fed is so powerful when the CPI inflation rate is so close to zero despite the Fed’s extraordinary efforts to reflate the economy over the past few years? Could it be that while the Fed may be able to control inflation, it can’t do much to stop deflation? Macroeconomists like Mr. Dudley are convinced that inflation is always a monetary phenomenon. I agree that rapidly rising inflation is always a consequence of excessively easy monetary policy. Tight monetary policy, if tough enough, can always lower the inflation rate. However, the deflationary pressures of recent years can be attributed to lots of non-monetary developments including the IT revolution, the rebound in productivity growth, the proliferation of free trade following the end of the Cold War, and the emergence of low-wage emerging countries like China. There’s not much that the Fed can do to stop deflation caused by these forces. Indeed, the Fed shouldn’t even try, since such deflation tends to boost the purchasing power of consumers, which is a much better stimulus program than any reflationary policy promoted by the Fed.

How Ben Bernanke is trying to raise taxes

Oct 12, 2010 16:05 UTC

It’s the return of the inflation tax, as Ed Yardeni rightfully notes:

The rational for another round of QE is to boost economic growth and to avert deflation. In other words, Fed officials would welcome a pickup in the inflation rate. The problem is that they are stoking an inflationary fire in the commodity pits. I doubt that’s the sort of inflation they are rooting for. Presumably, they want prices for consumer goods and services to rise moderately to stimulate producers to expand their capacity and to hire more workers. Higher commodity prices are a tax on consumers and producers and can have the opposite effect.

Best of the blogosphere

May 11, 2010 19:50 UTC

The best bits of the best stuff I have read today:
Larry Kudlow, CNBC, on the European bailout:

And in addition to Western Europe’s failure to enforce real welfare-state reductions, there really is no flat-tax reform — such as adopted in Eastern Europe — to promote growth. Ironically, the countries of Western Europe, including the southern tier of Greece, Spain, Portugal, and Italy, have a lower corporate tax rate than the United States. That is good. But they could build on that with real flat-tax reform, rather than jacking up value-added taxes.

So there are no enforced spending cuts, there is no flat tax, and there is plenty of political upheaval. (Angela Merkel just lost an important regional election.) So right now, on the day after a big relief rally in stock and bond markets, a sober assessment of the so-called rescue package doesn’t look so great. Actually, the real winner looks to be gold, which is up $20 this morning and is almost at its all-time high of $1,226. That’s a sign of no confidence in the European story. The euro currency has been compromised and the European welfare state continues. Not good.

Josh Barro, RealClearMarkets, on California debt problems:

California’s permanent budget crisis stems from institutional failures. Ballot measures have made it nearly impossible to raise taxes or cut spending, and have cemented the idea in voters’ minds that they can get government services without paying for them. The state has repeatedly failed to reform its inefficient tax code (which relies too much on highly volatile taxes on high-income people, and not enough on property taxes) or to tackle the problem of runaway public employee compensation. … The trouble with California is that it has a Mediterranean budget to match its Mediterranean climate. April’s numbers show that rosy tax receipts aren’t likely to improve matters any time soon. Like any Mediterranean EU member, California desperately needs an aggressive fiscal adjustment if it is to remain solvent.

Veronique de Rugy, Reason, on inflation:

The Federal Reserve is unwilling to take the inflationary route today. But investors know that other central banks have done so in the past and that the scenario could happen again. … If these growing deficits aren’t addressed by immediately and dramatically slashing spending—and there’s zero indication that such a shift will happen anytime soon—we are about to embark on the most massive transfer of wealth from younger taxpayers to older ones in American history. It will be not just unprecedented but unfair: Our children will have to pay for the decisions we make today.

Eileen Norcross, NY Post, on Chris Christie and NJ:

The governor is also directly challenging the monopoly hold of the NJEA. He backs a bipartisan bill to create a voucher program for students in the worst-school districts, and he supports the expansion of charter schools. Each reform would expose the teachers unions to competition, bringing down the cost of public schools while releasing students from some of New Jersey’s highest-spending and worst-performing schools. Christie inherited an unenviable budgetary framework, strangled with court-ordered school-spending formulas. He’s responding to voter anger over property taxes, but he knows that capping one source of revenue without capping total state spending only shifts the bill. Most important, he understands that New Jersey doesn’t have a revenue problem — it has a spending problem.


Gaius, you must be a true believer! Sorry, though, your facts are false. Since a picture is worth a thousand words, here’s a picture for you to study closely before repeating your lie about “Bush…running up greater deficits than Obama….”
http://blog.heritage.org/2010/02/05/past -deficits-vs-obamas-deficits-in-pictures  /
Not that I actually think you’ll repent, but there’s always hope for redemption.

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Bernanke nomination in more trouble than you think

Dec 22, 2009 15:48 UTC

Ben Bernanke’s close escape from the Senate Banking Committee sets him up for a record number of final “no” votes on his renomination as Federal Reserve chairman. A second term is still overwhelmingly likely. But such unprecedented disapproval suggests Bernanke will be a 2010 campaign issue. That could make the Fed ever more susceptible to political pressure when it comes to tighten the easy money spigot.

Fed nominations typically glide through committee. When President Jimmy Carter nominated G. William Miller for the post in 1978, the lone dissenting voice was that of gadfly William Proxmire of Wisconsin. He called Miller a joke and said putting him on the Fed would be like sending ballet star Rudolf Nureyev against the heavyweight boxing champ. And despite widespread public blame for the recession in 1981-82 Paul Volcker received just two no committee votes in 1983.

So seven negative votes out of 23 is historically high – nor was it just a few cranky contrarians dissenting. The ranking Republican voted “nay.” So too did Kay Bailey Hutchinson, a soft conservative running in the Texas GOP gubernatorial primary against a hardliner. That’s a strong hint that baseline conservative Republicans plan an anti-Fed platform in midterm elections. And pro-Bernanke votes will be wielded by challengers to incumbents.

So expect many GOPers to abandon Bernanke next month when his job along with a smattering of nervous Democrats facing re-election. Maybe a fifth to a third of the full Senate could vote no, a startling number considering that the high-water mark is 16 final votes against Volcker in 1983. A simple voice vote was enough for Alan Greenspan in 1992 and 2004, and Bernanke himself in 2006.

Congress is already nibbling at Fed independence. An audit of the central bank could even be inserted into financial reforms. There’s also an effort to toss the hawkish regional bank presidents off the group that sets monetary policy. Bernanke’s tepid support in the Senate is another crack in the Fed’s political heat shield. It is also one more reason to question whether the Fed will have the institutional guts to withdraw monetary stimulus when it should, despite stubbornly high unemployment.

Ben Bernanke, 2009 Person of the Year

Dec 16, 2009 13:37 UTC

Or so says Time. With the vast array of unprecedented Fed actions, it is hard to argue with the selection.  But this might not be Bernanke’s last selection if inflation picks up. Remember, the award goes for the person who had the most impact, for good or ill.


too true. remember Time’s 1938 man of the year? That ‘stache was all the rage.

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The coming assault on the Fed

Dec 11, 2009 15:09 UTC

This piece by Paul Krugman reinforces my feeling that the Federal Reserve is going to be hit hard for not doing even more to boost the economy. He wants the Fed balance sheet expanded even more to promote faster growth.

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

So why isn’t the Fed doing it? Part of the answer may be political: Ideological opponents of government activism tend to be as critical of the Fed’s credit expansion as they are of the Obama administration’s fiscal stimulus. And this has probably made the Fed reluctant to use its powers to their fullest extent. Meanwhile, a significant number of Fed officials, especially at the regional banks, are obsessed with the fear of 1970s-style inflation, which they see lurking just around the bend even though there’s not a hint of it in the actual data.

Me: The Fed is going to get hammered if it starts clearing the balance sheet and raising rates while unemployment is still elevated. Expect more attacks by Congress like Barney Frank’s wish to depower the regional Fed presidents, kicking them off the FOMC. Yes, the Fed is getting his in Congress by this audit bill. But the worst is yet to come.


More reason to be short the dollar!

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The bear case for gold

Dec 9, 2009 18:03 UTC

Mike Darda of MKM Partners gives it his best shot:

If there were ever a crowded trade, long gold and shor the dollar certainly fits the bill (no pun intended). Indeed, zero percent short rates and huge deficits as far as the eye can see have been important tailwinds for the yellow metal. And they remain in place. However, gold appears expensive relative to industrial commodities and has risen much more than bond market inflation expectations or the money stock over the course of the last year (the monetary base has exploded higher, but M2 growth has been more modest).

If the U.S. recovery is stronger than expected and the labor market turns in a material fashion, gold could begin to underperform industrial commodities and the dollar may catch a bid, at least against G7 currencies. The tight inverse correlation between the dollar and the stock market observed over the last 17 months may unhitch under such a scenario, as the long-term correlation between the DXY Index and the S&P 500 is zero. While a sustained gold correction may appear to be a low-probability event, if the 2008-2009 experience has taught us anything, it is to question the conventional wisdom in a repeated and rigorous fashion.

The Fed’s ‘crystal meth’ monetary policy

Nov 20, 2009 18:50 UTC

A classic from David Goldman:

The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in. … It isn’t just the 17.5% broad-measure unemployment number that we should worry about, but the massacre of smaller businesses, who are concentrated in the most vulnerable sectors: real estate, construction, and retail. Retail sales may get a temporary shot in the arm from cash for clunkers, and a combination of tax credits and (de facto) subsidized mortgage rates may hold up the bottom of the housing market for a short time. But today’s data show how fragile these matters are.


Monetary policy is one of the tools that a national Government uses to influence its economy. It is mainly used to low unemployment, low inflation, economic growth, and a balance of external payments.

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