Democrats may trip up Bernanke on the road to his inflation target

Discussion in 'Wall St. News' started by curis, Nov 15, 2006.

  1. curis


    Federal Reserve Chairman Ben Bernanke may find it harder to set an inflation target now that Democrats have gained control of Congress.

    Sen. Jack Reed of Rhode Island, Rep. Barney Frank of Massachusetts and other Democrats prefer that the Fed focus on promoting growth as well as containing inflation.

    Some legislators want the Fed to adopt a target for employment as well as prices ¡ª an anathema to Bernanke and others at the central bank.

    ¡°The Democrats will give Bernanke a tougher time than the Republicans on inflation targets,¡± said Tom Gallagher, a senior managing director at International Strategy & Investment Group in Washington. ¡°Support is going to be harder to come by.¡±

    Bernanke has argued that a target would help cement the Fed¡¯s credibility as an inflation-fighter and make it easier to manage the economy. If he¡¯s unable to press ahead, supporters say, those aims might be damaged.

    ¡°Both the Fed¡¯s political legitimacy and its ability to respond flexibly to shocks to the economy¡± would be impaired, said Adam Posen, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed official who in 1999 co-wrote a book with Bernanke on inflation targeting.

    Bernanke¡¯s idea already faced opposition within the Fed, and former officials said before Tuesday¡¯s elections that adoption of an inflation target was likely to be a gradual process. Fed Vice Chairman Donald Kohn declared himself ¡°an inflation-targeting skeptic¡± in 2003.

    Democrats captured the House of Representatives for the first time in 12 years, and late returns on Thursday showed them taking control of the Senate as well.

    While Bernanke stated in his Senate confirmation hearing last year that the independent Fed can adopt a numerical target for inflation on its own, he¡¯s unlikely to proceed without at least the tacit support of key lawmakers. The chairman has said it¡¯s important to ¡°vet¡± any such shift with the congressional committees that oversee the central bank.

    ¡°That could be complicated by Democrats taking over the committees,¡± said Chris Rupkey, senior financial economist at Bank of Tokyo¡±"Mitsubishi UFJ in New York.

    Under current law, the Fed has a mandate for both price stability and full employment. Bernanke, picked by President George W. Bush to succeed Alan Greenspan, has said that adopting an inflation target would bolster rather than hinder the Fed¡¯s ability to achieve both goals.

    Some Democrats are skeptical. Sen. Paul Sarbanes of Maryland, the ranking Democrat on the Banking Committee, which oversees the Fed, repeatedly has challenged Bernanke over targets. Sarbanes, who¡¯s retiring, voiced concern that the Fed would become too focused on inflation, to the detriment of promoting growth.

    A three-person Fed panel headed by Kohn is exploring changes in how the central bank communicates to investors and the public.

    ¡°If Bernanke seeks the Democrats¡¯ advice, they¡¯ll ask for a two-fer,¡± said Greg Valliere, chief political strategist at Stanford Washington Research. ¡°They¡¯ll want a target for unemployment and not just inflation.¡±

    Fed officials argue that the central bank can¡¯t set an unemployment target because it would be affected by factors such as population changes that are beyond its control. They say slowing growth in the working-age population has contributed to a reduction in the sustainable pace of U.S. job gains in recent years.
  2. S2007S


    i thought the democrats taking the house and senate would be a negative for the market place....and to think i was listening to the talking heads on that one...these are the same talking heads calling for dow 13,000...ha
  3. The definition of inflation is the biggest joke on earth. We have just gone through two of the greatest inflations of all time in less than 6 years. If housing goes through the roof its not considered inflation because you can use your house like an atm. If oil is up its bad. Hilarious.
  4. S2007S


    it is hilarious....high oil prices dont feed an economy, however skyrocketing housing prices are great for the economy....

    these last 5 years put the opportunity for many up and coming home buyers out of touch.
  5. piezoe


    S2007S said:
    i thought the democrats taking the house and senate would be a negative for the market place....and to think i was listening to the talking heads on that one...these are the same talking heads calling for dow 13,000...ha

    Democrats are probably not as Wall Street-friendly and as Isreal-friendly as Republican administrations have proven to be, not that Wall Street and Isreal have anything in common. Also , based on the actions -- or inactions, as the case may be -- of their SEC appointees, Republican administrations seem less interested in free and transparent markets. And as far as the stock market goes, if you are a trader, you don't care whether the market goes up or goes down, so long as it goes somewhere.
  6. That article was ridiculous. First the Fed is independent. Congress cannot tell them what policy to follow. A Fed Chairman who was seen bending to political winds from the likes of Barney Frank would totally lose all legitimacy and credibility. Second, unemployment is 4.4 %. How much lower can it realistically go? There are problems with explicit inflation targeting, but I'm sure Bernanke is aware of them.
  7. only if your not a renter....that first jump seems to be awfully big...and to break into that is getting harder...

    however skyrocketing housing prices are great for the economy....
  8. pkeigs


    I just wrote a paper of the advantages of having a nominal target, it has worked very well for new zealand and GB, canada has also had a great success with having a nominal anchor. Seems like the democrats would like to have a more pronounced political business cycle, where the fed is encouraged to have more expansionary targets at the expense of long term growth... Maybe the democrats want the economy to look good for the next couple of years to show that they are pro-business just in time for the 2008 presidential election