| WASHINGTON, March 5
WASHINGTON, March 5 It wasn't a fair fight. A
Republican-controlled committee of the U.S. House of
Representatives pitted three outspoken critics of the Federal
Reserve against a lonesome dove, who tried his best to defend
the central bank against charges it was ruining the country.
Entitled "Near-zero rates, near zero effect? Is
unconventional monetary policy really working?", the hearing on
Tuesday before the subcommittee on monetary policy sought to
explore the risks of ultra-bold Fed actions to spur U.S. growth.
It also allowed lawmakers to air numerous grievances over
the U.S. central bank. These grievances have spurred a rash of
legislative proposals - from removing the pursuit of full
employment from the Fed's dual mandate, to abolishing the
central bank altogether.
"Adopt a rule that restricts what the Federal Reserve can do
without your permission," Allan Meltzer, a professor at Carnegie
Mellon University who has written a highly regarded history of
the Fed, urged lawmakers in his remarks to the subcommittee.
At least five bills to reform how the Fed conducts monetary
policy have been proposed by Republicans in Congress already
None have a realistic chance of becoming law while Democrats
hold sway in the U.S. Senate and run the White House. But the
potential threat to the Fed's independence could grow if
Democrats lose their Senate majority in midterm elections in
Unease over dramatic monetary policy measures to restore
U.S. economic growth and bring down the unemployment rate, which
remains high at 7.9 percent, is not confined to Republican
Fed policymakers themselves are divided over the actions.
Fed Chairman Ben Bernanke has faced serial dissents from a
handful of policy hawks opposed to the central bank's bond
buying, although the vast majority have backed the steps he has
But Republicans on Capitol Hill, some of whom rode in to
Washington supported by voter anger over the Fed's involvement
in the bailout of Wall Street banks during the 2007-2009
financial crisis, have led the attack and are gunning for the
Fed for several reasons.
They were furious when it announced a third round of massive
bond buying a few weeks before the November 2012 general
election, claiming that this deliberately helped President
Barack Obama, a Democrat, win a second White House term.
Fiscal conservatives in the party have also slammed the
Fed's purchases of Treasury bonds for enabling what they say is
runaway government spending by the Obama administration,
something that they say will spur much higher inflation down the
Meltzer was flanked by economists John Taylor, author of the
well-known Taylor Rule of central banking, and David Malpass, a
former adviser to Republican presidents and chief economist at
investment bank Bear Stearns, an early casualty of the crisis
when it collapsed five years ago.
All three slammed the Fed for holding interest rates near
zero since late 2008 and for bond purchases that have tripled
the size of the Fed's balance sheet to around $3 trillion.
"I think Federal Reserve policies have been weakening and
distorting the economy rather than providing stimulus," said
Malpass. "The policies are hurting savers, distorting markets,
and redistributing capital rather than increasing it."
Fed critics complain that low interest rates are driving
investors to "reach for yield" by shifting into riskier assets
that could fan another asset bubble, courting a repeat of the
financial crisis that tipped the United States into recession in
Bernanke confronted this complaint head-on in a speech on
Friday, in which he proceeded to take the criticism apart.
"In light of the moderate pace of the recovery and the
continued high level of economic slack, dialing back
accommodation with the goal of deterring excessive risk-taking
in some areas poses its own risks to growth, price stability,
and, ultimately, financial stability," Bernanke warned.
The Fed's solitary ally on the panel before Tuesday's
hearing, Joseph Gagnon of the Peterson Institute for
International Economics, urged the Fed go even further to
stimulate the recovery.
"I believe America needs more expansionary policy. The
current stance of monetary policy is still too tight," Gagnon, a
former senior economist at the Fed Board in Washington, told
lawmakers. The recommendation was greeted with silence.