Politics of the Fed’s easy money

Dees Illustration

Emily Kaiser
Reuters

While voters cast ballots on Tuesday in an election expected to shift Congress to the right, the Federal Reserve convenes what could be its most pivotal meeting since the height of the financial crisis.

The central bank was designed to be above political influence. But its policy decisions are not completely immune to the political environment.

A more conservative Congress would reduce the already slim chance that more fiscal support will come, putting the burden squarely on the Fed’s shoulders to shore up a limp economy.

Douglas Holtz-Eakin, an economist who advised John McCain during his unsuccessful 2008 presidential campaign, said normally the Fed keeps quiet around elections to avoid any semblance of political involvement.

This time, the central bank sent a clear signal that it intended to take action, and investors are convinced the move will come this week in the form of relaunching asset purchases. This week’s policy-setting meeting lasts two days, so the Fed’s announcement will come on Wednesday, just after the election.

“It looks to me a bit desperate,” Holtz-Eakin said, adding that he was not convinced another round of money printing would do much to stimulate the economy.

“I would have liked to see them hold on to their ammunition in case we really need it.”

President Barack Obama’s Democratic party is expected to lose its majority in the House of Representatives, while the Democrat-controlled Senate may move closer to a 50-50 split.

Republicans have made opposition to last year’s $814 billion stimulus package a central plank of their election campaign, tapping into voter dissatisfaction with the slow pace of recovery and weak job market.

The White House, recognizing there is probably not enough political backing, has said little about additional stimulus. However, two former Obama administration officials — ex-Budget Director Peter Orszag and former Economic Adviser Christina Romer — have pressed hard for more help.

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