Ben Bernanke may have painted a big bullseye on the Federal Reserve when he spoke last week in Jackson, Wyoming, about the Fed providing additional stimulus if the economy needs it.
Although he wasn’t specific about what it might do and when it might do it, Bernanke clearly indicated that the Fed was ready to use the tools it had at it’s disposal to stimulate the economy given that (1) the recovery was not as robust as he thought it should be and (2) that additional fiscal policy stimulus measures were unlikely to be enacted in the current politics-of-obstruction political environment. As the minutes of its August meeting, which were released today, confirmed, Bernanke was definitely talking for a majority of the board of governors.
It’s not at all clear, however, whether Bernanke realizes that the same political pressure that has brought fiscal policy to a standstill in Washington is very likely to be applied to the Fed if it decides to move forward. With Republican policymakers seeing economic hardship as the path to election glory this November, there is every reason to expect that the GOP will be equally as opposed to any actions taken by the Federal Reserve that would make the economy better, and that Republicans will openly and virulently criticize the Fed for even thinking about it. The criticism is likely to come both before any action is taken to try to stop it from happening and afterwards to make the Fed think twice about doing more.
This will come in spite of the fact that, unlike fiscal policy changes, the actions the Fed is considering will not increase the budget deficit. The deficit has never really been the real issue; it has always been a subterfuge and an easy and convenient way to build opposition to the White House’s efforts to deal with the economy.
The GOP should have no trouble, therefore, pivoting away from the budget deficit and using some other reason for the Fed not to act. This might include a constitutional challenge to the Fed itself, a demand for Ron Paul-like legislation that would give Congress more oversight over the Fed, Glenn Beck-like criticisms that a handful of unelected Fed governors shouldn’t have the ability to formulate economic policy, and pointed criticism of specific Fed governors. It’s also not inconceivable that legislation will be introduced to take away some of the Fed’s powers, with the implicit threat being that it will be considered and adopted by a GOP majority next year.
If you're not familiar with what this criticism might be, take a look at this clip from 2007 featuring Rep. Ron Paul (R-TX) questioning Bernanke:
The Fed is, of course, an independent agency. It does not rely on Congress for an annual appropriation and in some very important direct ways is immune from political retribution. But it’s not completely impervious to criticism and, given what it’s done so far on the fiscal policy side, it’s hard to believe that the GOP won’t use the tools it has at its disposal.