Paul Ryan Misses the Mark on Fed Policy in Budget Blueprint

House Budget Committee Chairman Paul Ryan mischaracterizes the relationship between the Federal Reserve and the Obama administration in his discussion of monetary policy in the budget blueprint he released Tuesday.

Ryan implies that the government would ?crank up the printing presses? as the country's budget deficit rises, injecting fresh money into the economy to compensate for the country?s fiscal woes. That, he says, would have some nasty side effects:

Unless we change course, we will have a debt crisis. Pressed for cash, the government will take the easy way out: It will crank up the printing presses. The final stage of this intergenerational theft will be the debasement of our currency. Government will cheat us of our just rewards. Our finances will collapse. The economy will stall. The safety net will unravel. And the most vulnerable will suffer.

Ryan?s warning ignores the fact that the Fed is an independent institution and is bound by law to focus on its twin objectives of keeping prices stable and unemployment low. Congress created the central bank to be independent from politics by staggering the terms of its board and chairman and not subjecting it to the congressional appropriations process. If the Fed were to act directly at the behest of the Obama administration--or any administration--lawmakers with oversight of the Fed would hold it accountable for doing so.

Fed critics of late have primarily focused on the risks of the bank?s easy-money policies, not the accusation that the central bank is playing politics. Since the financial crisis, the Fed has used a number of tools in its attempt to boost the lackluster economy. It ramped up its communications efforts, trying to provide the market with greater assurance as to its future plans. It slashed its benchmark interest rate to zero in 2008. It sought to lower long-term interest rates and stimulate the economy through three successive rounds of large-scale bond-buying, known as QE1, QE2, and QE3,?as well as a separate?maturity-extension program?known as ?Operation Twist.?

The asset-purchase programs put downward pressure on long-term interest rates by?reducing the supply?of Treasury bonds (government debt) as well as mortgage-backed securities on the market. Investors react to the more limited supply by bidding up the prices of these securities. The interest rates on the bonds, which move in the opposite direction of prices, fall as a result.

The Fed hopes that by lowering interest rates, it will encourage economic activity. Minutes from the bank?s policy-setting meetings and statements by Fed officials reveal that decisions to undertake those purchases have been based on concerns about deflation as well as the country?s high unemployment rate, not political pressure.

That hasn't stopped the accusations of some critics. Texas Gov. Rick Perry famously?said in 2011, ?Printing more money to play politics ... is almost treacherous or treasonous in my opinion.? The most recent decision to launch a bond-buying program came just two months before the 2012 presidential election and caused some pundits and columnists to remark that Chairman Ben Bernanke (a Republican appointed by George W. Bush) and his policy-setting committee, which consists of Democrats and Republicans, handed the election to Obama by juicing the economy in the final stretch of the race. ?

But even many of the Fed's prominent critics believe policymakers' economic views, not their political perspectives, are behind the monetary-policy decisions. Some conservative critics of the central bank say the Fed's actions to stimulate the economy are evidence of Obama?s failure to fix the economy on his own. But most of those critics have not insinuated that the central bank was acting at the behest of the administration. Many critics have emphasized what they see as the risks of the unconventional policy course the Fed is charting; even former Rep. Ron Paul, R-Texas, a vocal Fed-basher who retired from Congress at the beginning of this year, didn't mention the election in the statement he released after the Fed announced QE3.

The Fed has pledged to keep up QE3, which is an open-ended $85 billion in purchases a month, until the labor market improves substantially. With unemployment at 7.7 percent, just 0.4 percentage points below the level it was when the Fed launched the program and well above the 5.2 to 6.0 percent the Fed has forecast over the long term,?and with inflation expectations contained, the Fed's policy-setting committee is likely to continue on with the easy-money policies for the time being because it thinks that's what's best for the economy?not what's best for politicians.

Source: http://news.yahoo.com/paul-ryan-misses-mark-fed-policy-budget-blueprint-202228150--politics.html

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