MacroScope

Central bankers vs. politicians: High-stakes chicken?

June 13, 2012

Are politicians playing chicken with central bankers? More to the point, if the U.S. Federal Reserve or the European Central Bank step up, yet again, to protect their economies from the global slowdown, will it take U.S., German, Spanish, Italian, Greek and other governments off the hook?

Such questions are swirling as Europe’s financial crisis boils and starts to bubble over into Asia and the Americas. Expectations are growing that the Fed will take more monetary policy action when it meets June 19-20. The messy possibility that Greece could exit the euro zone was not enough to prompt the ECB to cut interest rates last week – and that was before a deal over the weekend to bail out Spanish banks was dismissed by markets as just another kick of the can. Underlining the standoff between monetary and fiscal policymakers, ECB President Mario Draghi told European Parliament this on May 31:

Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no.

European central bankers “feel in some ways that the more they do, the more it takes pressure off the fiscal authorities,” said Lewis Alexander, U.S. chief economist at Nomura Securities. “So they’ve been reluctant to be more aggressive.”

The Fed, for its part, has one worried eye on the European crisis and the other on the U.S. “fiscal cliff” of big tax rises and spending cuts scheduled to kick in at the end of this year. Policymakers at the U.S. central bank rarely pass up a chance to publicly chastise Congress for putting off action on the cliff, which could slash U.S. GDP growth by an estimated 3 percentage points if left unaddressed. Meaning, of course, the United States would join much of Europe in another recession.

Chairman Ben Bernanke has said the Fed stands ready to protect the fragile U.S. recovery, but gave few clues that was imminent at a Congressional hearing in Washington last week.

I do want to say, and I’ve said this before, that monetary policy is not a panacea. It would be much better to have a broad-based policy addressing a whole variety of issues… I’d be much more comfortable in fact if Congress would take some of this burden from us and address those issues.

But chicken requires two to play.

“I believe that the Fed should use any tool in its arsenal to provide support to our fragile economy,” Democratic Rep. Carolyn Maloney told Bernanke. Kevin Brady, a Republican who wants the Fed to focus solely on inflation, said at the same hearing that Bernanke should “look the market in the eye” and say what the Fed’s plans were. “I wish you would take a third round of quantitative easing off the table,” Brady said.

So this week, Reuters asked Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, whether additional policy action by the U.S. central bank would really absolve Congress?

I’m not sure I buy that. I think the seriousness of our long term fiscal balance, as well as the so-called ‘cliff effect’ potential for early next year, is very clear to all concerned. And as some of my colleagues have, I would just support them coming to grips with this so that we have the most sensible approach to moving into a longer-term process of fiscal rebalancing.

I’m not buying the argument that monetary policy somehow takes them off the hook.

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