Former Fed chairman William McChesney Martin Jr. famously said that the central bank’s job was to yank away the punchbowl just when everybody is starting to party. And although the current chairman, Ben Bernanke, has signaled that the Fed will keep interest rates low for now, a round of higher rates inevitably will come.
The Fed finds itself both the punchbowl keeper and the punching bag. Imagine the outcry when it does begin to crank up rates, perhaps just ahead of the midterm elections next year.
Fireworks seem likely at Senate confirmation hearings next month on President Obama’s nomination of Bernanke to a second four-year term as chairman.
Many economists and Fed watchers say congressional efforts to rein in the Fed’s powers could interfere with the central bank’s ability to help guide the fragile economy to recovery.
The Fed’s very independence and its unique ability among US institutions to create money out of thin air enabled it to act quickly to stabilize the financial system when it froze in September, after the Lehman Brothers investment house went bankrupt, the Fed’s backers say.
“It might have been the Fed’s finest moment when it had to jump into the market,’’ said David M. Jones, a former Federal Reserve economist. “We still have to wait to see how effective the Fed is in its exit strategy and whether it can keep inflation in check. But this badgering by Congress, even if there is populist sentiment, is inappropriate.’’
The Fed’s aggressive intervention also set the stage for the current criticism. Many lawmakers question whether the Fed’s money machine has mainly benefited the financial markets, and not the broader economy. Lawmakers are also peeved that the central bank acted without congressional involvement when it brokered the 2008 sale of failed investment bank Bear Stearns and engineered the rescue of insurer American International Group.
