Congress to Bernanke: Do less, not more
Judging from recent economic commentary, there are plenty of economists who think the Federal Reserve needs to do much, much more to juice the U.S. economy. Scott Sumner, Paul Krugman, and the Economist have all lambasted Fed Chairman Ben Bernanke on this front.
But in Congress, this view seems curiously absent. On Thursday morning, Bernanke testified before the U.S. Congress Joint Economic Committee. Republicans at the hearing were quick to criticize the Fed chairman over recent reports that the central bank might contemplate more “quantitative easing” — the so-called QE3 — to jump-start the stalling recovery. Very few Democrats, however, offered any sort of counterbalance. At the moment, most of the political pressure on Bernanke is to do less stimulus, not to do more.
“I wish you would take QE3 off the table,” said Texas Rep. Kevin Brady, the ranking Republican on the committee. “I wish you would look the markets in the eye and say that the Fed has done too much.” Similarly, Sen. Jim DeMint (R-SC) complained to Bernanke that many of the stimulative measures the Federal Reserve has taken “are giving us a false sense of security.”
But what about Democrats? The ranking Democrat on the committee, Sen. Bob Casey, merely inquired, in a neutral tone, whether the Federal Reserve was planning to take further action. Bernanke simply replied that the Fed was still contemplating the matter, and a lot depended on whether “there will be enough growth going forward to make material progress on the unemployment rate.” (Fed officials meet on June 19 to discuss their next steps.)
Indeed, the harshest grilling that Bernanke got on the Democratic side was from Sen. Bernie Sanders (I-Vermont), who was more interested in criticizing the Federal Reserve for various conflicts of interest — the fact that, for instance, Jamie Dimon, the CEO of JPMorgan, still sits on the board of the New York Fed. About the only liberal encouragement Bernanke received was from Rep. Carolyn Maloney (D-N.Y.), who said, “I believe that the Fed should use any tool in its arsenal to provide support to our fragile economy.”
There are certainly experts who think the Fed hasn’t been doing enough. Charles Evans, the president of the Federal Reserve of Chicago, has argued at length that the Fed spends far too much time obsessed with inflation (which remains low) and not nearly enough time worrying about America’s unemployment rate (which remains quite high). Evans argued that the Fed could boost growth by being even more dovish about inflation.
But in Congress, no one’s even broaching that topic. Republicans like Sen. Mike Lee (R-Utah) asked Bernanke again and again whether he was failing to appreciate the dangers of future inflation. Democrats like Rep. Maurice Hinchey (D-N.Y.), by contrast, were content to say that “we have nearly exhausted the Fed’s tools.” There’s certainly no political pressure for Bernanke to take an Evans-like approach to boosting growth. Quite the opposite, in fact.
So will the Federal Reserve try to do more to boost the economy? Stock markets seemed to get excited about the prospect this week, after the Wall Street Journal reported that the Fed was considering new action amid worries that the recovery was stalling. And Janet Yellen, the number-two Fed official, said on Wednesday, “I am convinced that scope remains for the [Fed] to provide further policy accommodation.”
But Bernanke remained mum on Thursday. He did, however, explain to a skeptical Republican why QE3 could potentially provide more stimulus even though interest rates are already low. It would reduce the cost of borrowing money for corporations, bring down mortgage rates even further, and potentially boost the stock market “and therefore increase wealth effects for consumers” to spur more spending.
But, Bernanke cautioned, “there may be some diminishing returns” to further action. Earlier he had said that “I’d be much more comfortable if Congress would take some of the burden from us.”