Democrats Pressure Federal Reserve

Now that Democrats have control of Congress, Federal Reserve chairman Ben S Bernanke may find it difficult to establish an inflation target. For the first time in 12 years, Democrats have captured the House of Representative and taken control of the Senate. The Democrats sealed their Senate majority when Jim Webb defeated Republican incumbent George Allen.

Massachusetts Representative Barney Frank, Rhode Island Senator Jack Reed, and other Democrats prefer the Fed focusing on promoting growth as well as containing inflation. Some legislators advocate the Fed to adopt a target for employment as well as prices. According to Tom Gallagher, senior managing director at International Strategy & Investment Group in Washington, the Democrats would give Bernanke a tougher time than the Republicans on inflation targets. Bernanke says a target would help cement the Fed’s credibility as an inflation-fighter and make it easier to manage the economy. Supporters think if he is unable to press ahead, those aims might be damaged. According to Adam Posen, a senior fellow at Peterson Institute for International Economics, Washington, the Federal Reserve’s political legitimacy and ability to respond flexibly to shocks to the economy would be impaired.

Bernanke affirmed in his Senate confirmation hearing last year that the independent Fed can adopt a numerical target for inflation on its own. However, he’s unlikely to proceed without at least the implicit support of key policymakers. Under current law, the Fed has a mandate for both price stability and full employment. Bernanke thinks the adoption of an inflation target would boost rather than hamper the Fed’s ability to achieve both goals. Maryland Senator Paul Sarbanes has time and again challenged Bernanke over targets. Sarbanes, who’s retiring, expressed concern that the Fed would become too focused on inflation, to the loss of promoting growth. Reed, another Democratic member of the Banking Committee, has also warned Bernanke against adopting a rigid rule to guide monetary policy.