Any bid for the Presidency of the United States, from the tight race to the outcome, will surely affect both the U.S. economy and the capital markets at large. The 2012 election is no exception.
Follow our blog series for regular updates on the election and how each candidate’s strategy could impact the markets.
Today’s post focuses on Why the Fed and Politics Don’t Mix.
I don’t recall a previous presidential election in which central bank policy threatened to become a campaign issue, however the current election campaign promises to change that course. The Federal Reserve, its statutory dual mandate and its policy decisions appear likely to become prominent points of contention as the two presidential tickets square off this fall, and that could threaten the vital role it plays in our economy. Fed chairman Ben Bernanke will soon have an opportunity to quell that partisan debate when he speaks later this month at the Jackson Hole Fed policy symposium. I hope he takes advantage of it.
I consider President Obama’s 2010 reappointment of Ben Bernanke as Chairman of the Federal Reserve’s Board of Governors to be among his better decisions—comparable to President Reagan’s reappointment of Carter-appointee Paul Volker in 1983. In both cases, the presidents chose continuity over partisanship during a period of economic turmoil, which likely helped stabilize a difficult economic situation. But the Bernanke-led Fed’s subsequent decisions, a second round of quantitative easing, Operation Twist and its extension have led Republican presidential candidate Mitt Romney to state that, if elected, he expects to replace Chairman Bernanke when his term expires in early 2014. Governor Romney’s running mate, Representative Paul Ryan, criticized Fed policy in a 2010 opinion piece he co-authored with Professor John B. Taylor—a potential Bernanke successor in a future GOP administration. Although Ryan and Taylor approved of the Fed’s emergency actions in the fall of 2008 (which I consider part of QE1, though strangely they don’t), they argue that QE2’s effort to stimulate the economy in pursuit of its legal mandate to maximize employment takes the Fed into a policy realm that should belong to elected representatives, not independent central bankers.
I think they’re right. Maintaining price stability to avoid both deflation and inflation and protecting the financial system in times of deep crisis are appropriate, even essential, goals for central bankers. But trying to make an economy grow when fundamental conditions weigh against it is much more questionable, because it could undermine the Fed’s credibility if it fails and it relieves Congress of its responsibility to decide what should be done.
During the upcoming campaign, we’ll hear a great deal about how Congress should deal with that responsibility, which is what should happen during an election campaign. I’m very uncomfortable, however, with the central bank becoming a campaign issue. Some would argue that the Fed has already “politicized” itself by overly broadening its policy reach, but the Fed chairmanship becoming an election issue is a slide into dangerous territory.
I value an independent central bank and don’t want the Fed chairman to be the presidents’ man or woman. Chairman Bernanke could halt the slide by reminding us at Jackson Hole that the economy is recovering slowly from a deep financial crisis, that the Fed stands ready to deal with an unforeseen recurrence of a financial collapse, but then asserts that further monetary policy action at this time would do little to speed the economy’s recovery. Not only would he put the burden of legislative and regulatory actions back where I believe it belongs—with Congress—but he would distance the Fed from the electoral debate. That would be the best protection I can imagine for its continued independence and effectiveness.
1. John B. Taylor and Paul D. Ryan, “Refocus The Fed On Price Stability Instead Of Bailing Out Fiscal Policy” Investors.com, 11/30/10.