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Fed risks political fallout from QE3

By Robin Harding and James Politi in Washington

The US Federal Reserve was always going to catch a few political bullets if it launched an aggressive new easing only eight weeks before a presidential election.

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“The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down, and the risk for long-term inflation goes up.”

The criticism places the central bank in an uncomfortable position because it is all coming from one direction. Democrats are delighted by the move; Republicans are on the attack.

No matter how apolitical the Fed’s decisions – and chairman Ben Bernanke was at pains to assert his indifference to politics in a press conference on Thursday – the Fed’s activism in response to a weak recovery has political consequences.

The question is whether there are also consequences in the other direction: whether political debate about the Fed’s actions could result in change to its mandate or leadership. That remains a more distant prospect.

“What Romney is saying to the Fed is, ‘This is not your job’,” said Phillip Swagel, a professor at the University of Maryland School of Public Policy and a former economist for the George W. Bush administration. “QE3 will have a very modest impact on the economy . . . and if anything it stands in the way of fiscal policy.”

Some conservative economists think the Fed is over-interpreting the employment side of the dual mandate – and by lowering interest rates and making it easier for the US to finance debt in the bond markets, this removes the pressure from Congress to strike a deal on deficit reduction.

The most visible effort to clip the Fed’s wings is a bill introduced in the House of Representatives by Kevin Brady, a Republican from Texas, who is vice-chair of the Joint Economic Committee of Congress. His bill would limit the central bank’s mandate to inflation, not employment, and restrict its monetary policy operations to short-term Treasury securities.

Were his bill now law, Mr Brady told the Financial Times, “the Fed would not be able to embark on this third round of quantitative easing”. He said the bill had taken off faster than he had hoped and already had 48 co-sponsors in Congress. “Everyone, whether they agree or not, believes it is the right time to have this discussion.”

In depth

US elections 2012

staff fixes the presidential seal before US President Barack Obama gives a press conference

Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

But while Mr Romney has criticised QE3, it would be a huge leap to eliminate the employment mandate once in office. “I think you can do a lot without changes to the Federal Reserve Act,” says Prof Swagel. “Romney will probably look to appoint the next Fed chair as someone who is aligned with his views.”

That is the most realistic political consequence of the Fed’s actions: that when Mr Bernanke’s term expires at the end of January 2014, a new chairman is appointed who opposes them.

Once settled in the White House, however, even Mr Romney would have to consider whether a tight monetary policy was actually in his interest, given that re-election would probably depend on delivering strong economic growth.

Whether QE3 has any lasting political consequences for the Fed will probably depend on how well it works. “It puts critics of the Fed in a difficult position,” said John Makin, a resident scholar at the American Enterprise Institute in Washington, who called the programme of open-ended easing a “bold experiment”.

The Fed is trying to bring down high unemployment and, while the experiment is in progress, critics will struggle to make headway. If the experiment fails, however, and inflation rises sharply before unemployment comes down, the Fed may find itself hard-pressed to resist the proposals of Mr Brady and his colleagues.

With excruciating detail, the White House’s budget office on Friday laid out exactly where it will have to cut $109 billion from federal spending in January, including $11.1 billion from Medicare and $54.7 billion from defense spending.

The defense cuts include $21.5 billion from operations and maintenance for the Army, Navy, Air Force and Marines and the reserves and National Guard, and nearly $1.4 billion from military aide to Afghanistan, with tens of billions coming from procurement and other Pentagon accounts.

“The report leaves no question that the sequestration would be deeply destructive to national security, domestic investments, and core government functions,” the White House’s budget office said in the report.

Everything from fencing and technology along the U.S.-Mexico border to the government’s own internal watchdogs to local environmental programs are also on the chopping block.

The cuts fall particularly heavy on the federal civilian workforce, where staffing levels and salaries would be docked more than 8 percent almost across the board.

Also facing slashes are the National Institutes of Health, which would see a $2.5 billion cut, and the Centers for Disease Control and Prevention, which would have to trim $464 million, according to the 394-page report, issued by the White House Office of Management and Budget in response to a law.

The cuts are due under the terms of last year’s debt deal, which set up the automatic “sequesters” in exchange for granting the administration the borrowing authority to go deeper into debt. Last year’s deficit super committee was supposed to come up with replacements for the sequesters, but the bipartisan committee failed, leaving the automatic cuts in place. They take effect Jan. 2.

In the report, the White House’s budget office took pains to say it didn’t have any discretion, and that it didn’t support the cuts.

“The percentage cuts in this report, and the identification of exempt and non-exempt accounts, reflect the requirements of the laws that the administration is applying,” the report said. “With the single exception of military personnel accounts, the administration cannot choose which pro- grams to exempt, or what percentage cuts to apply.”

Administration officials said the numbers are preliminary, and will be updated based on 2013 spending levels that Congress is working on this month.

While military personnel were specifically exempted, other parts of the Pentagon were not, and will see a nearly 10 percent cut. The Army is slated to lose nearly $7 billion in operations and maintenance funding, and the Navy and Air Force will lose another $4.3 billion each in operations money.

Border fencing and technology would take a $33 million hit, and salaries and staffing for the U.S. Border Patrol and U.S. Customs and Immigration Enforcement would also be cut.

And at a time when embassy security is under question following the recent attacks, that account would be cut by $129 million.

Meanwhile Howard University, an historically black institution in the District of Columbia, would lose $19 million.

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Tamohara dasa ADMIN. September 15, 2012 1:53
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Fed risks political fallout from QE3

By Robin Harding and James Politi in Washington
The US Federal Reserve was always going to catch a few political bullets if it launched an aggressive new easing only eight weeks before a presidential election.

More video

Mitt Romney, the Republican candidate, duly opened fire on Friday after the Fed began an open-ended third round of quantitative easing (QE3), under which it will buy $40bn of mortgage-backed securities a month.

In some of the most aggressive comments he has made on the Fed, Mr Romney said QE3 was nothing but a “sugar high”, and would fail to get the economy moving.

“Recognise that, as the Federal Reserve keeps on trying to stimulate the economy by printing more money, that there’s a cost to that,” said Mr Romney in remarks at a fundraiser.

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Mixed economic data in wake of Fed stimulus

Hong Kong warns of assets bubble risk

Fed insists politics did not affect QE3

Bernanke takes plunge with QE3

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Foreign policy makes campaign comeback

Inside Obama’s HQ

Republicans question Romney tactics

IN US Economy

John Authers Fed felt it had to act

US wholesale prices in sudden surge

US median income lowest since 1995

US wholesale inventories rise in July

Click to enlarge

“The value of your savings goes down. People who are living on fixed incomes don’t see much interest income any more. And the value of the dollar goes down, and the risk for long-term inflation goes up.”

The criticism places the central bank in an uncomfortable position because it is all coming from one direction. Democrats are delighted by the move; Republicans are on the attack.

No matter how apolitical the Fed’s decisions – and chairman Ben Bernanke was at pains to assert his indifference to politics in a press conference on Thursday – the Fed’s activism in response to a weak recovery has political consequences.

The question is whether there are also consequences in the other direction: whether political debate about the Fed’s actions could result in change to its mandate or leadership. That remains a more distant prospect.

“What Romney is saying to the Fed is, ‘This is not your job’,” said Phillip Swagel, a professor at the University of Maryland School of Public Policy and a former economist for the George W. Bush administration. “QE3 will have a very modest impact on the economy . . . and if anything it stands in the way of fiscal policy.”

Some conservative economists think the Fed is over-interpreting the employment side of the dual mandate – and by lowering interest rates and making it easier for the US to finance debt in the bond markets, this removes the pressure from Congress to strike a deal on deficit reduction.

The most visible effort to clip the Fed’s wings is a bill introduced in the House of Representatives by Kevin Brady, a Republican from Texas, who is vice-chair of the Joint Economic Committee of Congress. His bill would limit the central bank’s mandate to inflation, not employment, and restrict its monetary policy operations to short-term Treasury securities.

Were his bill now law, Mr Brady told the Financial Times, “the Fed would not be able to embark on this third round of quantitative easing”. He said the bill had taken off faster than he had hoped and already had 48 co-sponsors in Congress. “Everyone, whether they agree or not, believes it is the right time to have this discussion.”

In depth

US elections 2012

Republican candidate Mitt Romney takes on President Barack Obama in the race for the White House

But while Mr Romney has criticised QE3, it would be a huge leap to eliminate the employment mandate once in office. “I think you can do a lot without changes to the Federal Reserve Act,” says Prof Swagel. “Romney will probably look to appoint the next Fed chair as someone who is aligned with his views.”

That is the most realistic political consequence of the Fed’s actions: that when Mr Bernanke’s term expires at the end of January 2014, a new chairman is appointed who opposes them.

Once settled in the White House, however, even Mr Romney would have to consider whether a tight monetary policy was actually in his interest, given that re-election would probably depend on delivering strong economic growth.

Whether QE3 has any lasting political consequences for the Fed will probably depend on how well it works. “It puts critics of the Fed in a difficult position,” said John Makin, a resident scholar at the American Enterprise Institute in Washington, who called the programme of open-ended easing a “bold experiment”.

The Fed is trying to bring down high unemployment and, while the experiment is in progress, critics will struggle to make headway. If the experiment fails, however, and inflation rises sharply before unemployment comes down, the Fed may find itself hard-pressed to resist the proposals of Mr Brady and his colleagues.
Copyright The Financial Times Limited 2012. You may share using our article tools.
Tamohara dasa ADMIN. September 15, 2012 1:55

With excruciating detail, the White House’s budget office on Friday laid out exactly where it will have to cut $109 billion from federal spending in January, including $11.1 billion from Medicare and $54.7 billion from defense spending.

The defense cuts include $21.5 billion from operations and maintenance for the Army, Navy, Air Force and Marines and the reserves and National Guard, and nearly $1.4 billion from military aide to Afghanistan, with tens of billions coming from procurement and other Pentagon accounts.

“The report leaves no question that the sequestration would be deeply destructive to national security, domestic investments, and core government functions,” the White House’s budget office said in the report.

Everything from fencing and technology along the U.S.-Mexico border to the government’s own internal watchdogs to local environmental programs are also on the chopping block.

The cuts fall particularly heavy on the federal civilian workforce, where staffing levels and salaries would be docked more than 8 percent almost across the board.

Also facing slashes are the National Institutes of Health, which would see a $2.5 billion cut, and the Centers for Disease Control and Prevention, which would have to trim $464 million, according to the 394-page report, issued by the White House Office of Management and Budget in response to a law.

The cuts are due under the terms of last year’s debt deal, which set up the automatic “sequesters” in exchange for granting the administration the borrowing authority to go deeper into debt. Last year’s deficit super committee was supposed to come up with replacements for the sequesters, but the bipartisan committee failed, leaving the automatic cuts in place. They take effect Jan. 2.

In the report, the White House’s budget office took pains to say it didn’t have any discretion, and that it didn’t support the cuts.

“The percentage cuts in this report, and the identification of exempt and non-exempt accounts, reflect the requirements of the laws that the administration is applying,” the report said. “With the single exception of military personnel accounts, the administration cannot choose which pro- grams to exempt, or what percentage cuts to apply.”

Administration officials said the numbers are preliminary, and will be updated based on 2013 spending levels that Congress is working on this month.

While military personnel were specifically exempted, other parts of the Pentagon were not, and will see a nearly 10 percent cut. The Army is slated to lose nearly $7 billion in operations and maintenance funding, and the Navy and Air Force will lose another $4.3 billion each in operations money.

Border fencing and technology would take a $33 million hit, and salaries and staffing for the U.S. Border Patrol and U.S. Customs and Immigration Enforcement would also be cut.

And at a time when embassy security is under question following the recent attacks, that account would be cut by $129 million.

Meanwhile Howard University, an historically black institution in the District of Columbia, would lose $19 million.

Read more: White House details 'destructive' spending cuts - Washington Times http://www.washingtontimes.com/news/2012/sep/14/white-house-details...
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