The nation?s central bankers dusted off a 1960s-era plan in hopes of rousing the sluggish economy Wednesday, taking the unusual step of shifting $400 billion into longer-term bonds in hopes of slashing interest rates further.
The Federal Reserve?s Open Market Committee voted 7-3 to embark on what?s informally called ?Operation Twist,? a move first used during the heyday of Chubby Checker and named for his song of the same name.
Continue ReadingWith the announcement, Fed Chairman Ben Bernanke led an institution that prizes its independence deeper into a political minefield. Because of gridlock between President Barack Obama and Congress, much of the burden for fixing the economy has rested on the Fed ? making it a target for GOP lawmakers and presidential contenders such as Texas Gov. Rick Perry and former Massachusetts Gov. Mitt Romney.
On Tuesday, the four top Republican leaders in Congress called on Bernanke not to try to stimulate the economy ? advice the Fed effectively rejected Wednesday.
?In really difficult economic times, the chairman of the Fed gets too much blame,? said Mark Olson, a former governor at the central bank who is now co-chairman of Treliant Risk Advisors. ?There is only so much the Fed can do in the absence of Congress addressing some of the fiscal issues.?
House Speaker John Boehner, Senate Minority Leader Mitch McConnell and other GOP leaders had tried to wedge themselves into the Fed decision. The Fed has previously tried to boost the economy by purchasing a combined $1.85 trillion of U.S. Treasury bonds and mortgage-backed securities.
?We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,? the lawmakers wrote. ?Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers.?
Exerting political pressure on Bernanke may have rallied the Fed to act, since the committee likely found ?this political meddling repugnant,? wrote JPMorgan Chase economist Michael Feroli in a client note.
?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,? he said.
That independence can be a double-edged sword. Since the Fed has fewer political constraints than Capitol Hill, monetary policy can become a poor replacement for policies that should go through Congress, said Carnegie Mellon University economist Marvin Goodfriend.
?What?s happened in the current circumstance, the flexibility to act decisively apart from government has been put in a predicament,? said Goodfriend, a former official at the Richmond Fed Bank. ?The very independence they have is creating pressure for them to use their independence as a substitute for government action.?
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