12:59 PM
The politics of the Fed's easy money
Addison Ray
By Emily Kaiser
WASHINGTON | Sun Oct 31, 2010 3:08pm EDT
WASHINGTON (Reuters) - While U.S. voters cast ballots on Tuesday in an election expected to shift Congress to the right, the Federal Reserve convenes what could be its most pivotal meeting since the height of the financial crisis.
The central bank was designed to be above political influence. But its policy decisions are not completely immune to the political environment.
A more conservative Congress would reduce the already slim chance that more fiscal support will come, putting the burden squarely on the Fed's shoulders to shore up a limp economy.
Douglas Holtz-Eakin, an economist who advised John McCain during his unsuccessful 2008 presidential campaign, said normally the Fed keeps quiet around elections to avoid any semblance of political involvement.
This time, the central bank sent a clear signal that it intended to take action, and investors are convinced the move will come this week in the form of relaunching asset purchases. This week's policy-setting meeting lasts two days, so the Fed's announcement will come on Wednesday, just after the election.
"It looks to me a bit desperate," Holtz-Eakin said, adding that he was not convinced another round of money printing would do much to stimulate the economy.
"I would have liked to see them hold on to their ammunition in case we really need it."
President Barack Obama's Democratic party is expected to lose its majority in the House of Representatives, while the Democrat-controlled Senate may move closer to a 50-50 split.
Republicans have made opposition to last year's $814 billion stimulus package a central plank of their election campaign, tapping into voter dissatisfaction with the slow pace of recovery and weak job market.
The White House, recognizing there is probably not enough political backing, has said little about additional stimulus. However, two former Obama administration officials -- ex-Budget Director Peter Orszag and former Economic Adviser Christina Romer -- have pressed hard for more help.
"The necessary shifts in fiscal policy are extremely unlikely to happen," Orszag wrote in the New York Times last week. "So we're left relying on monetary policy ... which may create more problems than it solves."
Orszag warned that the Fed's easy money makes government borrowing unusually cheap, leaving Congress less inclined to tackle medium-term deficit cuts that he thinks are essential to a sustainable recovery.
OH YEAH, THE JOBS REPORT
This week brings a veritable feast for central bank watchers. In addition to the Fed, the European Central Bank and Bank of England hold their meetings on Thursday, and the Bank of Japan brought forward its next policy review to Thursday and Friday, heightening speculation that it may ramp up its own asset-buying program after the Fed's announcement.
No policy changes are expected from the ECB or the BoE, particularly after last week's surprisingly strong reading on Britain's third-quarter economic growth.
Posts
