MacroScope

Four leading Republicans wrote to Federal Reserve Chairman Ben Bernanke before the Fed’s Sept. 20-21 policy meeting recommending the Fed stop taking steps to boost growth. Fed interventions to pull down the high unemployment rate may do more harm than good and risk inflation, the officials said.

The Fed to some extent brushed those objections aside, deciding at the end of the meeting that a deteriorating outlook warranted buying and selling $400 billion worth of Treasuries to shift its holdings to longer maturities. Doing so should push down longer interest rates and may promote mortgage refinancing, Fed officials hope.

While the Fed would likely argue that its action was not the same as expanding its balance sheet through outright bond buying – which many critics objected to – it was nevertheless taking an active step, and could draw criticism from Republican lawmakers and candidates for the presidency. How could Congress make life miserable for the Fed? Lawmakers of both parties have proposed measures that would diminish or alter the Fed’s role.

– Republican Representatives Mike Pence and Senator Bob Corker want to narrow the Fed’s focus solely to inflation fighting, and take away its current responsibility to ensure full employment consistent with stable prices. Pence and Corker say the requirement that the Fed focus on bringing down high unemployment distracts it from doing its job properly. They worried that the Fed’s $600 billion bond buying plan that ended in June would fuel inflation.

– During 2010 financial overhaul deliberations, Republican Representative Ron Paul, who favors abolishing the Fed and tying the value of the dollar to gold or silver, gained strong support for a measure that would allow congressional review of Fed monetary policy decisions. The provision did not survive to be signed into law under the Dodd-Frank financial overhaul rules rewrite, but lawmakers could seek to revive it. Any decision to allow congressional review of Fed monetary policy decisions could compromise Fed independence from political pressure.

– Democratic Representative Barney Frank is seeking to have the 12 regional Federal Reserve banks around the country represented by officials appointed by the White House and subjected to Senate confirmation. Currently, regional Fed banks are represented by presidents selected by their own boards of directors and vetted by the Fed board in Washington, but not subject to congressional approval. Such a move would shift the balance of power away from local businesspeople and community leaders in Fed districts to Washington.

– Congress could also hold up nominees to the 7-seat Fed board, which is understaffed by two. Republican lawmakers blocked one of President Barack Obama’s appointees, Nobel laureate Peter Diamond, from a seat, saying he lacked qualifications and that he was too likely to support aggressive easing measures.

What do experts say about the letter from senior Republican lawmakers to Bernanke urging him to desist from monetary activism? Many with knowledge of the Fed and politics say the letter is unlikely to have any effect on the Fed, although one called it “inappropriate.” It is political posturing and directed as much at politicians’ constituents as it is at the Fed. The central bank is by design politically independent and is under no obligation to respond to recommendations by lawmakers, these experts said.

Nevertheless, the fact that the Fed opted to take a step that did not expand its balance sheet – and thus could not technically be described as additional stimulus – suggests central bank policymakers are sensitive to how their actions are perceived by the public.