Yesterday the top four Republican Congressional leaders sent a letter to Fed Chairman Bernanke about monetary policy. I think that was a big mistake.
The letter weighed in on the Fed’s debate about monetary policy, and was sent by Speaker Boehner, Leader Cantor, Leader McConnell, and Whip Kyl. The key text is:
Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
I’m not commenting today on the economic or substantive policy view the Leaders express, but instead on the process point. The U.S. has several long-standing economic policy advantages over many other countries. One of those advantages is a fairly apolitical monetary policy process. I think monetary policy is worse when it is influenced by political pressure from Congress or the White House. The Leaders’ letter is a clear attempt to apply pressure to the Fed.
The letter offers a commonly-expressed opinion about what the Federal Open Market Committee should (not) do. Coming from market participants, academic economists, or an editorial page, these views are perfectly appropriate and contribute to a vigorous policy debate.
But it’s different when such policy input comes from those who have the legal and political ability to harm or weaken the Fed. Even if elected officials don’t include “or else” in their policy statement (and the Republicans leaders did not), everyone knows that it’s implied to some degree. Monetary policy influenced by volatile political winds will be unstable and unpredictable over time. That’s bad.
The paradox is that if you’re an inflation hawk and agree with the substance of the Leaders’ letter, you should be a strong advocates for Fed independence and not sending such letters. In general political pressure from both ends of Pennsylvania Avenue will far more often press for looser monetary policy. The more effective Congress or the White House is at shaping Fed decisions, the greater the long-term risk of too-high inflation.
The Republican leaders aren’t the only ones pressuring the Fed. As the Wall Street Journal editorial page points out, House Financial Services Committee Ranking Member Barney Frank has his own strategy to push for looser monetary policy in the long run. He’s doing it indirectly by laying the groundwork for changing the makeup of the FOMC in a way that will lead to a more dovish monetary policy.
The Supreme Court metaphor is an apt one. Which is worse: Republican leaders sending a letter to the Supreme Court telling them how they think the Court should decide on a pending case, or a senior Democrat in Congress talking about legislatively restructuring the Court’s membership in a way that everyone knows will lead to more liberal justices over time? Both apply pressure to the Court’s decisions through implicit threats.
This metaphor isn’t perfect. The Constitution makes the Supreme Court a separate and equal branch of government, while an independent Fed is a Constitutional anomaly at best.
Update: A friend points out that Members of Congress frequently file amicus briefs in court cases. Yep, this metaphor is far from perfect.
I have no doubt that Members of Congress on both sides of the aisle will continue to weigh in on monetary policy. I wish they wouldn’t. Congress has plenty of fiscal policy problems on their plate, and their pressure on monetary policy undermines a long-term advantage of the American economic system.
(photo credit: Joe Hatfield)