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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.
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.
