The Fed Responds to Stimulus Criticism

The Federal Reserve – in a highly unusual action – is defending its recent purchase of Treasury bonds in an effort to get the U.S. economy moving. Critics of the decision to purchase additional assets, led by former Fed chairman Alan Greenspan, conservative economists and writers, representatives of foreign governments – not to mention Sarah Palin — say that the Fed is deliberately weakening the dollar to make American exports more competitive.  Other arguments are that the Treasury bond purchases could eventually cause inflation and that the action won’t stimulate economic growth.

William Dudley, President of the Federal Reserve Bank of New York, countered that the objective is not to weaken the dollar or cause inflation.  In fact, he believes that the Fed’s moves are already having a positive impact.  “You’ve seen a significant easing of financial conditions,” according to Dudley.  “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.”  Fed Vice Chairman, Janet Yellen, agrees, telling the Wall Street Journal that action was necessary to spur the economy.  If there is no monetary stimulus, Yellen says “I’m having a hard time seeing where really robust growth can come from.”

Dudley’s and Yellen’s comments seem to confirm that the Fed is no longer staying out of public debate over its policies.  Although the Fed has typically remained above the fray to maintain its appearance of political independence, that stance has proved untenable in the face of the turmoil that resulted from the financial crisis.  As a result, the Fed is now open to criticism from small-government conservatives and liberals who don’t trust Wall Street.  Unfortunately for the Fed, Congressman Ron Paul (R-TX) — who based his 2008 presidential bid on his opposition to monetary policy – will soon chair the committee that oversees the Fed and plans to use the post as a “mini bully pulpit,” he said.