Guest Bloggers: William Doane & John Gabrielski
In spite of the gloomy semi-annual report of the economy delivered by Federal Reserve Chairman Ben Bernanke to the Senate panel on Tuesday, the U.S. stock market, in particular the DOW and the NASDQ, showed 78 and 13 point gains, respectively. The market responded positively notwithstanding Bernanke apparently crushing all hopes of an unemployment rate below 7% until 2014, and his observation of an even slower growth rate than that of the previous quarter’s 2.5% gain. Bernanke advised investors that because of a “frustratingly slow” unemployment rate, there really is no “quick fix” to create a sustained recovery. While he spoke of several possible stimulus paths to boost growth, he also warned of their counterproductive risks.
However, in Wednesday’s second meeting in Capital Hill, things began to heat up. Surprisingly, the market again moves up notwithstanding Bernanke’s bleak economic remarks, with the DOW and the NASDQ gaining 103 and 33 points, respectively.
With elections coming up, congress did more than just question the Federal Reserve Chairman. While Bernanke delivered essentially the same comments to the House that he delivered on Tuesday to the Senate, several of the questions directed at Bernanke focused on the “audit-the-fed” bill (HR – 459) sponsored by Representative Ron Paul from Texas.
In short, the “audit-the-fed” bill is a push for further transparency, and increasing accountability. Bernanke replied by agreeing to the need for transparency and accountability, but defended the fed by stating that the Federal Reserve is already rather transparent (meeting four times a year), and is already partially reviewed by the Government Accountability Office. Ron Paul claimed that the entire federal system is flawed, and went on to attack the IMF, national debt, and government spending.
Under Ron Paul’s bill, the Governmental Accountability Office would audit the Fed’s monetary policy deliberations; under the current practice, such deliberations are exempt from such audits. Bernanke voiced his concern that politics not enter into the deliberations of monetary policy. “[The “audit-the-fed” bill] is a great concern, because there’s a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer term,” he said.
“The nightmare scenario that I have is one in which some future Fed chairman would decide to say, raise the federal funds rate by 25 basis points, and somebody in this room would say, ‘I don’t like this decision and I want the [Government Accountability Office] to go in … and give us an independent opinion of whether or not that would be the right decision,” Bernanke said.
Establishing a system in which the Fed’s monetary policy moves could be immediately called into question by lawmakers would have a “chilling effect” on the institution and generally reduce its ability to help steer the economy, he warned.
“There’s a lot of evidence that an independent central bank … will deliver lower inflation and better economic results,” he said.
Many experts, such as Michael Dueker, a former economist at the St. Louis Federal Reserve and current chief economist at Russell Investments, believe that Ron Paul’s bill will go nowhere. Dueker, in an interview after the hearing, said that there is enough oversight of the Fed already and that “the Fed would resist strongly any sort of oversight in terms of second guessing their decision making.”
Going back to Bernanke, he also stressed that current U.S. fiscal policies are unsustainable – the U.S. economy is on the edge of a “fiscal cliff” with the impending tax increases and spending cuts expected to take place on January 1, 2013. Bernanke said that if those tax increases and spending cuts take place, the Fed is predicting a shallow recession early next year with a slow decline in job creation. Public uncertainty about the economy could make the economic situation even worse, he said.
In his interview, Dueker said the impending spending cuts are a bigger concern than the tax increases, since tax codes can be passed retroactively. But cuts to Defense Department spending are much harder to reverse after the fact, he said. Dueker stated that “the first order of business would be to do something to relieve the full Draconian force of defense cuts.”
Expressing further concern about the impending “fiscal cliff,” Bernanke recommended that Congress address these economic challenges by considering the long-term sustainability of the U.S. economy, as well as “the fragility of the recovery” in order to boost public confidence. “Under current law (i.e., the “fiscal cliff”), taxes will continue to grow, interest will continue to accumulate, and ultimately, we will simply not be able to pay our bills,” Bernanke said.
The impact of the tax increases and spending cuts all hitting at the same time “would be very negative for growth,” he said. “It is important to find a more gradual approach.”