I am not sure what to make of the letter sent to Fed Chairman Ben Bernanke from the four Republican Congressional leaders expressing their concern over any additional stimulus from the Fed.
Some Democrats have already expressed outrage that the GOP leadership is trying to strong arm the Fed and challenge its independence. Many believe the GOP is simply trying to prevent anything that can help improve the economy before next year’s election. Others may simply believe it is high time that this unelected powerful body is reined in.
I am more interested in their motivation. Or more to the point, if they believe the letter would alter the Fed’s course of action. Several people have criticized Chairman Bernanke for not exercising his authority during the 2008 credit crisis. Some have indicated that Bernanke ceded some authority over to Treasury Secretary Hank Paulson during the intense negotiations over what to do with Lehman and the various institutions that stood on the brink in September of 2008.
Former FDIC Chairman Bill Isaac pointedly noted in his book on the crisis how phone logs indicated that former New York Fed President and current Treasury Secretary Tim Geithner had been in contact with Paulson and other folks connected to Goldman Sachs much more often than with his boss at the Fed.
I am curious whether there is a notion out there that Bernanke is a soft touch who would acquiesce to such pressure.
He did not in this case as the Fed carried out it's much anticipated “twist” strategy. It does seem to make more sense than another round of quantitative easing.
AS for the letter it will be interesting to see what the fallout is. The wording of it is vague enough that the authors could claim victory simply by the fact that there was no QE3, though that most likely was already off of the table.
The move would actively attempt to narrow the yield curve. A yield curve inversion (when longer-term rates are lower than short-term rates) is usually a sign of an oncoming recession, so it is odd the the Fed would actively attempt to narrow the yield curve.
The market reaction was interesting but I would like to know what active traders think of the move. Please give us your opinion.