WASHINGTON (Reuters) - The U.S. Federal Reserve managed to dodge a bullet last year when it emerged even more powerful after a rewrite of financial rules despite widespread popular anger for its role in bailing out banks.
It now faces fresh pressure from the political right over its loose monetary policy just as the presidential campaign season begins to heat up. Whether the fresh jostling will lead to any concrete changes or affect central bank policy is hard to tell.
But for the Fed, an institution designed to operate independent of politics, it is an uncomfortable position to be in. At the margins, it certainly complicates the central bank’s task of explaining its unusual actions to a skeptical public facing weak economic growth and a 9.1 percent jobless rate.
The latest salvo came on Tuesday when the four top Republicans on Capitol Hill admonished Fed Chairman Ben Bernanke to refrain from further “intervention” in the economy, casting the central bank’s $2.3 trillion in bond purchases as a failure.
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” House Speaker John Boehner, Senate Minority Leader Mitch McConnell, Senator John Kyl and Representative Eric Cantor said in a letter to Bernanke.
The Fed appeared to shake off the pressure on Wednesday when it launched a new program aimed at fostering a stronger recovery, although it stopped short of an outright expansion of its bond holdings.
The Senate’s No. 2 Democrat, Dick Durbin, accused Republicans of trying to block efforts to help the economy.
“The message is simple: do nothing,” he said on the Senate floor. “Stand by the sidelines and watch this economy languish.”
Since launching a second round of bond purchases last November, the Fed has been criticized by Republicans for laying the base for inflation and undercutting the dollar.
The central bank -- seen as a savior of Wall Street but not Main Street during the financial crisis -- has already taken a beating on the Republican presidential campaign trail.
Former Massachusetts Governor Mitt Romney has said he would not reappoint Bernanke, while Texas Governor Rick Perry, another leading candidate, has equated the Fed chief’s actions with treason.
The letter from congressional Republicans appeared to reflect a belief that those attacks were resonating positively with voters, and it raised an implicit threat that Congress -- as the Fed’s creator -- could act to rein in the central bank.
“The letter puts the Fed on notice that there’s concern in Congress, and that Congress has powers, and their actions could be a point of debate during the election,” a senior Republican Senate aide said.
Lawmakers could move to take away the Fed’s directive to pursue full employment. They could also revive efforts to place monetary decision making under closer congressional scrutiny.
Democrats, who control the Senate, would almost certainly block those measures, but if Republicans captured the Senate in 2012 and retained control of the House, all bets would be off.
Representative Jeb Hensarling, a member of the House Republican leadership, defended the decision of his colleagues to share their views with Bernanke.
“As much as I disagree with a number of actions of the Federal Reserve, I desperately don’t want members of Congress conducting monetary policy. But this right now is not your grandfather’s monetary policy,” he told reporters.
In response to the worst recession since the Great Depression, the Fed brought interest rates effectively to zero and expanded its balance sheet to a record $2.9 trillion through a series of purchases of Treasury and mortgage bonds.
Ironically, financial market analysts said the efforts to influence the Fed could actually restrain internal dissent at the central bank as policymakers band together, although that was not the case on Wednesday. The same three officials who dissented in August against a Fed decision to extend a low interest rate vow voted against the new decision.
Still, the Republican move left a bad taste with some observers on Wall Street already jaundiced by an earlier political battle over raising the nation’s debt limit.
“Just when you thought economic policy-making in the U.S. couldn’t get any worse ... congressional leaders chose to pressure the central bank during an ongoing monetary policy meeting,” said Michael Feroli, chief economist at JPMorgan in New York.
“Economists disagree on many things but one proposition that has near-universal assent is that sound monetary policy should be conducted free of political interference.”