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GOP leaders urge Fed to back off from more stimulus

September 20, 2011 |  8:18 pm

Gopleaders
Four Republican leaders sent a letter to Federal Reserve Chairman Ben S. Bernanke ahead of the central bank’s meeting this week, urging him to avoid “further extraordinary intervention” in the economy.

The letter, reported by the Wall Street Journal on Tuesday, shows the pressure Bernanke is facing from the GOP as the Fed considers whether to try to bolster economic growth with additional monetary stimulus.

The letter was signed by House Speaker John Boehner of Ohio, Sen. Minority Leader Mitch McConnell of Kentucky, Sen. Minority Whip Jon Kyl of Arizona and House Majority Leader Eric Cantor of Virginia, the Journal said.

Fed policymakers will wrap up their meeting Wednesday and are widely expected to announce a new bond-buying plan aimed at pulling longer-term interest rates lower.

Bernanke has signaled that the Fed could resurrect a move it undertook in the 1960s known as Operation Twist: The Fed, which owns $1.6 trillion in Treasuries, could shift that portfolio by selling shorter-term debt and using the proceeds to buy longer-term bonds.

The net effect would be to twist the so-called yield curve, meaning the level of longer-term interest rates compared with short-term rates. In theory, by adding to demand for longer-term Treasury bonds, the Fed could pull those rates down further. That could translate into lower rates on corporate, municipal and mortgage bonds, for example.

If the Fed commits to a new Operation Twist, it would be the third bond-buying program it has launched since November 2008. The last one was a $600-billion purchase program completed in June.

The difference this time is that most analysts believe that the Fed wouldn’t print new money to fund its purchases. If the central bank merely swaps shorter-term Treasuries for longer-term securities, the net amount of its holdings won't change.

That would allow the Fed to say that it isn’t engaging in so-called quantitative easing -- pumping more money into the financial system -- and therefore that the bond purchases wouldn’t threaten to stoke inflation.

Whether that would be enough to appease GOP leaders isn’t clear.

From their letter to Bernanke, according to the Journal:

Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.

It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board members, academics, business leaders, members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.

The Fed will issue its post-meeting statement at about 11:15 a.m. PDT on Wednesday.

RELATED:

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-- Tom Petruno

Photo: House Speaker John Boehner, left, and Senate Minority Leader Mitch McConnell. Credit: Karen Bleier / AFP / Getty Images

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