By Wednesday evening, Republicans who had caught wind of “Operation Twist,” the Federal Reserve’s latest plan to stimulate the economy, didn’t have many kind words for the move.
Rep. Scott Rigell, a Virginia freshman, said that the Fed’s decision to swap short-term for longer-term bonds could continue a concerning trend of fueling inflation without growth. “It’s indisputable that low-interest rates favor job creation. That said, the Fed has been, I think, overly aggressive in increasing the money supply which I think creates the very real risk over time of inflation, including the risk of hyperinflation,” Rigell said. He warned that, in the long-term, the Fed’s policies could devalue the U.S. currency to paper money. “If they artificially inflate the money supply, it’s what turns countries into banana republics,” he said.
It is somewhat difficult to see how Operation Twist would substantially inflate the money supply. The policy simply swaps $400 billion worth of Treasuries that come due in three years or less for $400 billion of Treasuries that come due in six years or more. The hope is that it will stimulate borrowing by businesses and consumers, with economists estimating the move will shave 0.2 percentage points from long-term interest rates. But Rigell is not alone in his skepticism of the Central Bank.
His comments echo recent claims by Republican presidential candidates that Ben S. Bernanke is the “most inflationary” Fed chairman in history. (In fact, inflation under Bernanke has been lower than under any Fed Chairman save William McChesney Martin Jr.) House Majority Leader Eric Cantor (R-Va.) also raised such concerns. “I think that many of us feel that some of the very loose monetary policy has had a negative effect as far as global confidence in our currency and ultimately in our economy,”Cantor told reporters Wednesday.
What’s more, pushing against the Fed gives Republicans another way to push an alternative vision for the economy to the public--and hit Democrats for their failures. Even though Obama isn’t responsible for Bernanke’s decisions, he’s responsible for the economic conditions that have pushed the Fed to act.
Another prominent freshman, Sen. Marco Rubio (R-Fla.) insisted that Bernanke’s very attempt to intervene is a sign that the White House’s economic policies haven’t worked. “I don’t think Bernanke would admit it, but I think the Fed is trying to compensate for bad economic policy on behalf of policy leaders here in Washington, including the administration,” Rubio said Wednesday.
Rubio said he didn’t know the details of Operation Twist but held firm to the idea that the Fed was overextending itself as a poor substitute for proper economic reforms. “I always think that monetary policy should be about monetary policy and not about managing the economy,” he said. “You need to explore things like tax reform, regulatory reform in a serious way...as opposed to monetary policy.”
Monetary policymakers might suggest that it’s difficult to separate what is proper “monetary policy” and what is “managing the economy.” But the Fed’s most committed skeptics might say that’s exactly the problem.
Freshman Sen. Rand Paul (R-Ky.) didn’t have any specific criticism of Operation Twist on Wednesday, only condemning the Fed’s interest rate manipulation in general for being “primarily responsible for the housing boom and the housing depression.” But he saw the Republican warning letter to Bernanke, which Paul took as the latest sign that the party was “coming around” in its effort to curb the Fed’s authority.
“It’s become a very mainstream issue, you had people in the House last year saying that the Fed mandate maybe should be changed--maybe from controlling prices and employment to maybe just controlling prices,” Paul said, crediting his father, Republican presidential candidate Ron Paul, for laying the groundwork for such concerns.