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Republicans seek reform of Federal Reserve

17 Nov.

Political opposition to the US Federal Reserve’s new $600bn round of quantitative easing – nicknamed QE2 – is becoming a push by some Republicans for a change in the Fed’s mandate, dropping its goal of maximum employment and making it focus only on inflation.

“It is time that we work to clarify the mandate of the Federal Reserve. Providing our central bank with a clear and explicit focus on keeping inflation low will serve America better than the broader mandate approach we have today,” said Bob Corker, a Republican senator from Tennessee, on Tuesday.

Mr Corker joined with Mike Pence, an influential Republican in the House of Representatives and an outspoken critic of QE2, to push for a change. The Fed’s unusual “dual mandate” requires it to pay equal attention to both employment and inflation.

The move by Mr Corker and Mr Pence is the first time that the domestic backlash against QE2 has turned into calls for a policy change.

A group of Republican economists wrote an open letter to Fed chairman Ben Bernanke this week saying QE2 – which involves buying Treasury securities in an effort to drive down long-term interest rates – risks “currency debasement and inflation”.

The Fed and most academic economists are more worried about the risk of inflation falling too low and think fears that QE2 could lead to runaway price rises are misplaced.

But the calls for an inflation-only mandate may end up proving that, for all the sound and fury about QE2, outside criticism has little power to move the independent central bank.

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