Even by the standards of the long history of politicians trying to influence decisions by the Federal Reserve, the latest episode is surprising.
On Tuesday night, when Fed policymakers were midway through a two-day, closed-door meeting to decide the nation’s monetary policy, Republican congressional leaders released a letter they had sent to Chairman Ben S. Bernanke saying that the central bank ought not take any new steps to ease monetary policy.
“Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy,” wrote House Speaker John Boehner, Senate Minority Leader Mitch McConnell, Senate Minority Whip Jon Kyl and House Majority Leader Eric Cantor. “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy.”
The lawmakers requested that the letter be distributed to other Fed policymakers.
The Fed has been evaluating what steps it might take to loosen monetary policy in the hope of encouraging economic growth. The results of the meeting are due out at 2:15 p.m. Wednesday. One widely discussed option would be to swap out some of the shorter term government bonds the Fed already owns for longer-term ones to try to lower long-term interest rates, such as for mortgages and corporate loans.
While the central bank has always endured its share of criticism for monetary policy decisions, the latest letter from congressional Republicans is notable for several reasons.
First, its timing: By sending a letter just as Fed officials are gathering to meet, the lawmakers intended to directly influence the Fed’s immediate decision. Usually when politicians push their views on monetary policy, they do so with broad brushstrokes, rather than in targeted ways that could appear to undermine the Fed’s independence from elected officials.
Second, its official origins. It’s one thing when a random member of Congress slams the Fed on policy. But this letter was signed by the two Republican leaders from each house of Congress. That makes it the official voice of the GOP. Congressional Republicans are explicitly rejecting the practice, embraced by both the George W. Bush and Obama administrations, of holding back from overtly and officially pressuring the Fed.
Third, the direction of the pressure. The Fed has a long history of being pushed to cut interest rates, even at the risk of stoking inflation. George H.W. Bush’s administration, for example, strongly urged then-Fed chief Alan Greenspan to cut interest rates heading into the 1992 election. But it is a newer phenomenon for politicians to agitate against easier money and lower interest rates — particularly at a time when unemployment is high and inflation is low.
So what will this mean for the Fed? The determination to resist political influence is deeply wired in the institution’s DNA. Already this election season, Bernanke has been pilloried over his policies in Republican presidential debates — one of the things that the candidates can agree on.
So, while each of the Fed policymakers at the table is surely aware of the Republicans’ demand, it’s unlikely any will bring it up. The Federal Open Market Committee typically discusses its economic analysis rather than politics (we will find out for sure in five years, when a transcript of the meeting is released).
But if the letter has any influence, it might do the opposite of what its authors intended. Fed officials who may have been on the fence over whether to take action may decide to act, lest they appear to have bowed under pressure. The three officials who dissented from last month’s policy decision may be more inclined to go along with this one out of institutional solidarity.
George H.W. Bush’s administration eventually concluded that its attempts to influence Greenspan were counterproductive -- they may have made the Fed more stubborn about not cutting rates at risk of compromising their reputation for independence. Congressional Republicans may risk the same.