By John W. Schoen, Senior Producer
After three years of dealing with the biggest financial collapse since the 1930s, the Federal Reserve is coming up short on ideas to get the economy back on track. But there's no shortage of advice from Congress on how the central bank should do its job.
As the central bank wraps up one of its most critical meetings in years, congressional leaders on both sides of the aisle have unleashed vocal critiques. GOP leaders sent Fed Chairman Ben Bernanke a letter?telling him to hold off on any additional easy-money move to lower rates to try to spur the economy. Meanwhile Barney Frank, the ranking Democrat on the House Finance Committee, is set to introduce a bill to remove the voting powers of five regional Fed bank presidents (chosen from the 12 regional banks on a rotating basis) and replace them with five appointees chosen by the White House and approved by the Senate. ?
Former Fed officials say the congressional kibitzing will have little impact on the Fed's?decision-making.
"The Fed isn't going to be held back," former Fed governor Laurence Meyer, who is now a?private?economist, told CNBC. "In fact, if I were a member of the board, I'd want to do something bigger today just to send a message to those people."
Fed watchers widely expect the Fed to reach deep into its bag of monetary tricks to try to push long-term interest rates even lower than the current rock-bottom?rates through a maneuver dubbed Operation Twist, which was last tried in the 1960s. When it reports on the results of its deliberations on Wednesday, the policy-setting Federal Open Market Committee also may take the unusual step?of setting fixed targets for unemployment and inflation.
Extraordinary times?
Deliberations over?those?extraordinary measures come at an extraordinary time. The European financial system is teetering on the edge of collapse. Four years after a historic housing bubble burst, prices continue to fall. Unemployment is at levels not seen in decades.
Now, top congressional Republicans have taken the uncommon step of telling the Fed what to do, urging policymakers not to make any more efforts to lower interest rates. In a letter to Bernanke, the group argues that the Fed's policies haven't helped the economy expand or boost employment and that current policies may spark inflation, a view also held by several Fed governors. ?
"We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy," the letter said. The Fed said it had received the letter, which was released by Republican leaders, but it had no further comment.
Fed-bashing also has been popular among Republican presidential candidates. Former Massachusetts Gov.?Mitt Romney said he would not reappoint Bernanke, while Texas Gov.?Rick Perry, another leading Republican candidate, called the Fed chief's actions "treasonous" and all but threatened him with bodily harm.
"If this guy prints more money between now and the election, I don't know what y'all will do to him in Iowa, but we would treat him pretty ugly down in Texas," Perry told supporters in Iowa last month.
Though unusual, it's not the first time the Fed has been the subject of political pressure. The White House famously pressured then-Fed Chairman Arthur Burns to ease monetary policy to aid President Richard Nixon's re-election ?in 1972. After Burns' successor, G. William Miller, failed to contain runaway wages and prices, President Jimmy Carter replaced him with Paul Volcker, who ultimately tamed inflation after it cost Carter his job in 1980.
Earlier this year, Republican lawmakers blocked President Barack Obama's nomination of MIT professor Peter Diamond to serve on the central bank's board. Diamond, a Nobel laureate, had voiced support for the Fed's easy-money policies.
Frank has a different bone to pick with the central bank. He argues that Congress should have a greater say in the selection of the presidents of the regional banks, who sit in on policy meetings and become voting committee members on a rotating basis. Those presidents are now chosen by regional boards made up of local bankers and other business leaders.
Defenders of the system argue that it was created as a compromise to give regional interests a counterbalance to the central banking powers in Washington and New York, where the Fed president is a permanent voting member of the committee. Giving the regional bankers voting authority helps lend their views added weight in setting Fed policy, according to former Fed governor Randall Kroszner.
"When I was sitting there I never really thought so-and-so is voting and so-and-so is not voting. I was listening to what they're saying. But I think if they never voted I might not have listened as carefully," Kroszner told CNBC.
Congress has only nominal oversight of the Fed, which by law is required to report to both chambers twice a year and answer questions. Beyond that, the legislature has historically respected the separation of powers and the need to cede control of the nation's monetary policy to an independent body insulated from political pressure.
"I personally think an independent Fed is a very, very important thing to maintain," Indiana Republican Gov. Mitch Daniels told CNBC. "Governments that part with the independence of their central banks eventually punish their citizens."
For their part, central bankers haven't been much impressed with the way Congress has handled the fiscal policies of taxing and spending. On more than one visit to Capitol Hill, Bernanke has patiently explained how swollen budget deficits make the Fed's job much harder.
All the more reason the latest GOP pressure will have little impact on the Fed's decisions.
"I think they have to have a laugh about the Republicans," said Meyer. "These are the guys who don't understand fiscal policy now giving the Fed advice."
Click on the video below for Jim Cramer's view:
"Why aren't we down 1,000 points already? I think because the S&P has yield," says Mad Money host Jim Cramer. "I like what [Ben Bernanke] is doing. He has no failure of imagination."
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Source: http://bottomline.msnbc.msn.com/_news/2011/09/21/7879464-fed-wont-be-deterred-by-congress-kibitzing
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