The best response we’ve seen to the GOP’s open letter to Bernanke — in which top leadership calls for no more stimulus — comes from BTIG’s Dan Greenhaus.The most insightful of his points:
Despite protestations to the contrary, Ben Bernanke is not an idiot. He knows, as does the entire economics community, that unemployment cannot be lowered in the long run through increases in inflation. Nobody honestly believes this. However there is a growing chorus of economists that suggest a burst of inflation in the short run is hardly the worst thing in the world. Ben Bernanke is not one of those economists which makes the attacks on the Fed so interesting. The Chairman has used every possible opportunity to push back on the idea of changing the Fed’s target inflation level.
This hasn’t stopped many commentators and politicians from repeatedly suggesting the Fed’s actions will cause inflation. Perhaps senior Republican lawmakers are finally acknowledging their wrongness as the letter says nothing about inflation. Instead, it says that what has been done so far has not reduced the unemployment rate or increased growth rates but has increased uncertainty among the business community. This may be true and indeed, we are sceptical of further stimulus.
As for the impact:
- Nobody has any problem with any member of Congress speaking their mind as to the proper conduct of monetary policy. That is perfectly fine, as is disagreeing with the course chosen. However this instance is different. This is an official letter written some the most senior members of a particular party suggesting that the Federal Reserve not follow a particular course of action that monetary policy makers deem necessary
- Greater political influence on the conduct of monetary policy is going to be very worrisome to investors.
- This is not to say politicians have not influenced or tried to influence the Fed in the past but not since the Volcker induced recession in the early 1980s have politicians felt so comfortable speaking about policy
- Ultimately, we believe Ben Bernanke will be thoroughly uninfluenced by the letter, as he was uninfluenced by any negative commentary in 2008, 2009 or 2010.
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