We heard it more than once at today’s hearing of the Joint Economic Committee featuring Fed Chairman Ben Bernanke: the central bank’s low interest rate policies are allowing Congress to delay tough decisions on long-term spending.
As U.S. senator Dan Coats asked pointedly: “Is the Fed being an enabler for an addiction Congress can’t overcome?”
Yet, if you read the subtext of Bernanke’s testimony closely, it may actually be Congress that is enabling a loose Federal Reserve.
That’s because it is the very fiscal tightening mandated by Congressional inaction that is forcing the Fed to continue stimulating growth. Chicago Fed President Charles Evans said on Tuesday the economy could be expanding as quickly as 3.5 percent were it not for the fiscal drag from Washington.
Bernanke echoed that sentiment in his testimony on Wednesday:
The Congressional Budget Office estimates that the deficit reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise. In present circumstances, with short-term interest rates already close to zero, monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.