Are Political Winds Turning Against the Fed?

The popular view concerning the Fed is that it is apolitical. Anyone who considers the timing of the Fed’s actions knows this is false. However, for the vast majority of Americans, including financial professionals, the Fed is thought to be an apolitical entity focusing exclusively on economic and financial matters.


The first indication that this was inaccurate occurred during Bernanke’s reappointment as Fed Chairman in 2009. The media tried to claim that Bernanke was the savior of capitalism, but the fact of the matter was that there was strong opposition to his re-appointment. After all, Bernanke had not only missed the crisis but had in fact repeatedly stated it was contained.


From a competence perspective, Bernanke should not have been reappointed. He had an abysmal track record and had in fact allowed the entire financial system to nearly implode. Small wonder then that numerous members of Congress were against his reappointment.


During this period, an intense lobbying effort was made on Bernanke’s behalf. Lost amidst the bustle of articles concerning this situation was the following tidbit:


I was advised that rejecting [Bernanke's] nomination would cause markets to nose dive, which would hurt retirees and families saving for their future. I am not enthusiastic in my support. " - Senator Barbara Mikulski (D- MD)


Here is a US Senator who was advised that not reappointing Bernanke would mean a collapse of the markets. The argument was financial in nature, but it is clear that the Fed was no longer an apolitical body. Bernanke was another political figurehead, who needed support in order to retain control.


Barack Obama reappointed Bernanke as Fed Chairman in August 2009. Obama had made a point of disparaging the Bush Presidency for leaving the US economy in shambles during his election and the initial stages of his first term. So it is of note that Obama decided to reappoint Bernanke, who, as Bush’s Fed Chairman, had been a key player in allowing the Crisis to happen.


As this stage, Bernanke’s tenure as Fed Chairman became closely aligned with the Obama Presidency, a fact that became increasingly clear in the lead up to the 2012 Presidential election when numerous Republican candidates, particularly Mitt Romney and Newt Gingrich began to single out the Fed, particularly its then Chairman, Ben Bernanke, as a political issue that needed to be dealt with.


Indeed, there is no clearer evidence that the Fed became a political organization than Bernanke’s announcement of QE 3 in September 2012, just two months before the election. This move was a clear and unprecedented political intervention on the part of Bernanke to aid Obama in his campaign for re-election. We know this because:


1)   The Fed had only just ended QE 2 a few months before in June 2012.

2)   US GDP growth was 1.7% in the second quarter of 2012, well above the 1.3% from the second quarter of 2011 and only slightly below the 2.0% from 1Q12.


Moreover, Bernanke didn’t just launch QE 3 in September 2012; that same month he also promised to keep interest rates at zero through 2015.


Regardless of one’s personal views, at this point it was clear that the Bernanke Fed was viewed as a political extension of the Obama administration. This politicization intensified after Bernanke stepped down and Janet Yellen was appointed Fed Chair in 2014.


Indeed, the New Yorker notes that Yellen is the most liberal Fed Chairman in recent history:


Yellen is notable not only for being the first female Fed chair but also for being the most liberal since Marriner Eccles, who held the job during the Roosevelt and Truman Administrations. Ordinarily, the Fed’s role is to engender a sense of calm in the eternally jittery financial markets, not to crusade against urban poverty.


Yellen has even touted her version of liberal social justice in speeches. She recently stated that the Fed should continue its accommodative policy even AFTER the economy is back on track:


"And so even when the headwinds have diminished to the point where the economy is finally back on track and it's where we want it to be, it's still going to require an unusually accommodative monetary policy," she is quoted as saying in the article that stresses Yellen's role as public servant.


"I come from an intellectual tradition where public policy is important, it can make a positive contribution, it’s our social obligation to do this," she says in an online version of the article. "We can help to make the world a better place." idUSKBN0FJ1I820140714


We realize we’ve covered a lot of ground here. So we want to do a brief recap.


1)   The Fed, which is supposed to be apolitical, has become increasingly politicized in the post-2008 era.

2)   This politicization has intensified in recent years to the point that former Fed Chairman Bernanke actively boosted the economy with QE 3 to help the Obama administration’s reelection bid.

3)   Today’s Fed is openly political in its monetary views on social justice.


In this light there has been a recent shift in political attitudes towards the Federal Reserve. That shift finds Congress pushing to crack down on the Fed’s monetary policies… particularly the fact that the Fed never has to answer to anyone.


New legislation is being introduced to make the Fed accountable to Congress.


So it is good news that today the ‘‘Federal Reserve Accountability and Transparency Act of 2014” was introduced into Congress. It requires that the Fed adopt a rules-based policy…


Thus the rule would describe how the Fed’s policy instrument, such as the federal funds rate, would change in a systematic way in response to changes in the intermediate policy inputs, such as inflation or real GDP. The rule would also have to be consistent with the setting of the actual federal funds rate at the time of the submission.


The Fed, not Congress, would choose its Directive Policy Rule and how to describe it.  But if the Fed deviated from its rule, then the Chair of the Fed would have to “testify before the appropriate congressional committees as to why the [rule] is not in compliance.”  The Comptroller General of the United States would determine whether or not the Directive Policy Rule was in compliance and report to Congress.


This represents the beginning of something BIG for the Fed. The actual process will months. But we need to be aware of this change because it would greatly rein in the Fed’s actions going forward. Given than the Fed is the driving force for the capital markets and risk today, this issue is of major import.


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Best Regards


Phoenix Capital Research