Future Fed move could raise questions

By Paul Davidson, USA TODAY
Could the presidential election prompt the Federal Reserve to put off a possible new initiative to jolt the sluggish economy?

A Federal Reserve policymaker emphatically says that politics is playing absolutely no role in its deliberations.

But some economists say a desire to steer clear of the political fray could tip a close decision on whether to push down interest rates in favor of waiting until after the race is over. And history shows that Fed members at least have had to face questions about whether their actions were partly shaped by presidential politics.

In a highly anticipated speech Friday, Fed Chairman Ben Bernanke built a strong case for taking steps to stimulate the recovery, calling the stagnant labor market a "grave concern" and adding that the Fed "will provide additional policy accommodation as needed."

Many economists say the Fed will vote at its mid-September meeting to buy more Treasury bonds or mortgage-backed securities to lower long-term interest rates. Others say the Fed will delay such a move in light of mixed economic reports and possibly take the more modest step of tentatively committing to keep short-term interest rates near zero until at least 2015. The current plan extends to 2014.

Additional government security purchases likely would cut long-term rates and lift the stock market, possibly helping President Obama's re-election chances. And it almost certainly would invite criticism from Republicans that the move risks higher inflation.

In an Aug. 23 interview with Fox News, Republican nominee Mitt Romney said that "another Fed stimulus is not going to help this economy. I think that is the wrong way to go."

Atlanta Fed chief Dennis Lockhart said in a CNBC interview last week that politics "has no effect. Politics simply do not come up." Policymakers, he added, are "focused on simply what's good for the economy over the long term ... and there is no discussion or minimal discussion of politics."

Still, Boston Fed chief Eric Rosengren recently suggested to the Boston Globe that his colleagues may be gun-shy because of the election. "We don't get to pick the timing of the global slowdown," he said. "If there's a slowdown and you have an independent central bank, the appropriate response is to act."

Cornelius Hurley, counsel to the Fed in the 1970s, says he thinks Fed board members "will take (the election) into consideration, but at the end of the day I think they'll do whatever they think is right."

Mark Zandi, chief economist of Moodys Analytics, says the Fed likely plans to put off a major stimulus until the end of the year anyway to see if a divided Congress can agree on a way to soften the negative economic impact of scheduled spending cuts and tax increases.

But if a government report on Friday shows somewhat weak job growth that makes a new stimulus a borderline call, the election may well sway the Fed to hold off. "I think they would prefer not to be a topic in the presidential race," he says.

Steve Hanke, applied economics professor at Johns Hopkins University, went further, saying he thinks the Fed would have acted already, if not for the presidential race. He added that he didn't think waiting until after the election would hurt the economy.

Other Fed policymakers have faced similar quandaries. Former Fed Chairman Alan Greenspan was forced to hold a news conference in October 1992 to respond to reports that the Fed was delaying any interest rate moves until after that year's presidential election to avoid the appearance that it was doing the bidding of the George H.W. Bush Administration.

In at least once instance, the Fed may actually have succumbed to political forces.

Former President Richard Nixon pressured former Fed chief Arthur Burns to push down interest rates prior to the 1972 election, according to a fall 2006 Journal of Economic Perspectives article that cited Nixon's phone transcripts.

The move boosted growth in the short term but "created serous problems for the economy that took nearly a decade to resolve," the article states.


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