Bernanke defends Fed’s independence in letter to Issa

In what is becoming a yearly tradition, Federal Reserve Board Chairman Ben Bernanke’s policy came under scrutiny by Congressional Republican leaders. The Fed Chair addressed specific questions presented by Rep. Darrell Issa (R–Calif.), chairman of the House Committee on Oversight and Government Reform, regarding the Fed’s stance on current issues.

Throughout the letter, Bernanke defended the Fed’s independence from Congress and its current monetary stance. Refusing to beat around the bush, Bernanke lays out his opinion of the state of the economy in his opening to the first question. “There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” he says. Bernanke goes on to say that because interest rates already are at record lows, that easing necessarily must come in unconventional forms.

Bernanke has taken flak from some members of Congress in the past who wanted the Fed to forgo any further easing. Last September Sen. Mitch McConnell , Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor sent a letter to Bernanke expressing reservations regarding any further monetary stimulus by the Fed. Some saw this as a challenge to the Fed’s independence.

Consequently, Jay Feuerstein, CEO of Xenon Group, said he was impressed by Bernanke’s letter to Issa and called his defense of the Fed’s independence “a refreshing step in the right direction.”

In addition to upholding the Fed’s independence from Congress, Bernanke also challenged other parts of the government to support the economy. “Moreover, as I have noted many times in congressional testimony and elsewhere, monetary policy is not a panacea, and policymakers in many different arenas should carefully examine the steps they could take to foster a more vigorous recovery,” he says.

On the topic of productivity in the economy, Bernanke even went so far as to call out Congress for its specific role in this part of the economy. “Productivity is also affected by a range of government actions, including the characteristics of the tax code and the quality of education that society provides, to name just two,” he says. Of course, those two items both are under the purview of Congress.

More questions have been raised since the release of the Federal Open Market Committee’s (FOMC’s) latest meeting minutes about the possibility of a third round of quantitative easing (QE3) in light of recent disappointing economic numbers. Although Bernanke defended the Fed’s independence in making that decision, Feuerstein doesn’t see that as being likely. “Nonetheless, [QE3] requires increasing the Fed’s balance sheet and I do not believe that Bernanke will thumb his nose at Congress’ strong stance on limiting government borrowing,” he says.

Next week’s events include the FOMC’s annual retreat to Jackson Hole, Wyo., which will conclude on Aug. 31 with a speech by Bernanke. The tone of the minutes from the July/August Fed meeting released this week has caused some analysts to speculate QE3 may be in the works.

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