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Monday, July 17, 2006

It's the New Guy's Fault

If the economy begins to weaken as the election approaches, Republicans are worried voters will hold them accountable. To shift the focus away from their economic policies, Bernanke and the Fed will be an easy target:

Bernanke May Deliver Unwelcome Election-Year News to Republican Lawmakers, Bloomberg: Federal Reserve Chairman Ben S. Bernanke may deliver his fellow Republicans a message they'd rather not hear when he gives Congress his monetary-policy report this week: The economy is slowing and inflation remains a risk.

President George W. Bush and his Republican colleagues, trailing in the opinion polls, are counting on the strength of the economy to help them retain control of Congress in the November elections. A slowing economy -- in response to repeated Fed interest-rate increases -- will undercut that campaign theme.

''They're certainly going to be blamed if the economy slows down,'' says Karlyn Bowman, a polling expert at the Republican- leaning American Enterprise Institute in Washington. ''That's something they need to worry about.''

There are signs they do. ''The Fed should take a break from any further rate increases,'' says Representative Don Manzullo, an Illinois Republican and a member of the House Financial Services Committee. ''Manufacturing is just starting to recover.''

Kevin Hassett, who works with Bowman at AEI ..., says some Republican lawmakers are ''nervous'' about Bernanke's handling of the economy. ''They're worried about whether he's up to the job,'' said Hassett...

Republican Representative Spencer Bachus..., a member of the House Financial Services Committee, says he gives Bernanke and the Fed high marks for dealing with a challenging economy.

Others aren't so kind. Republican Senator Jim Bunning, a long-time Fed critic, says he intends to confront Bernanke at this week's hearing about the problems he's causing the economy by continuing to raise rates.

The Kentucky senator has called Bernanke an ''amateur'' and blasted the former Princeton University professor for unnerving markets with his anti-inflation rhetoric. ''He's been in a cocoon of academia and is not ready for prime time,'' says Bunning.

The unease is shared by some Democrats. ''I think this has been overly aggressive,'' Connecticut Senator Chris Dodd told reporters on July 11. ''Because he's new and probably less sure of himself in these matters, he's leading the Fed to be a bit more over-reactive.'' ...

From the Fed's perspective, the slowdown is welcome because it will help ease pressure on inflation. Others worry it might go too far. ...

''We're very worried about the consumer getting hit,'' says David Lereah, chief economist at the NAR. So too are lawmakers, especially Republicans, who would take the blame if the economy nosedives in response to tighter credit from the Fed.

Representative Barney Frank, a Democrat from Massachusetts, says many workers have seen little, if any, increase in wages. Add on top of that a softening jobs market, and it's a problem for Republicans in November, he says. ''If the Fed slows things down, they're increasing that problem,'' Frank says.

I'm also worried about overshooting and believe the Fed should take a breather to assess how much tightening is already in the system, but I am not concerned at all about whether the Fed, Bernanke included, is up to the job. No matter what the Fed does, the economy will cycle through good times and bad, so they are always an easy target even when they do their job well. If there's a good part to the Fed being used as a political scapegoat around elections, it's that it gives lawmakers a good reason to keep the Fed independent - someone to blame when things go wrong.

    Posted by on Monday, July 17, 2006 at 04:02 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (11)


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