With ‘Operation Twist,’ the Fed Rediscovers Half Its Job – to GOP's Chagrin

By Jim Tankersley | Wednesday, September 21, 2011 | 4:09 p.m. Photo: Mark Wilson/Getty Images

The first two paragraphs of Wednesday’s Federal Reserve statement read like Edgar Allen Poe writing in the Financial Times. “Growth remains slow,” the nation’s central bankers write, with “continuing weakness in overall labor market conditions.” Investment is weak, the housing market is “depressed” and, cheeriest of all, “there are significant downside risks to the economic outlook, including strains in global financial markets.”

That dreary litany contains exactly one piece of good news: Inflation, the members of the Federal Open Market Committee report, has moderated, and could actually be on course to fall below the Fed’s unofficial target of 2 percent annual growth.

All of which helps explain the Fed’s announcement that it will commence “Operation Twist,” a $400 billion effort to push down interest rates and promote investment and hiring – and which makes the letter congressional Republicans sent to Fed Chairman Ben Bernanke on Tuesday so puzzling.

The Fed has two missions: to stabilize prices and to push the economy to full employment. That’s the so-called “dual mandate.” This month, like every month, the FOMC reminded everyone of both missions by repeating them in its statement: “Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability.”

You can quibble with the duality of that mandate – Republicans such as former House Speaker Newt Gingrich, and conservative economists such as Stanford’s John Taylor, have proposed stripping out the jobs half and focusing the Fed solely on inflation. Bernanke has signaled in the past that he wouldn’t oppose such a move.

But as long as the Fed is charged with attacking unemployment and inflation – and as long as one of those (unemployment) appears glaringly high while the other appears under control – it’s difficult to make the case that the central bank shouldn’t do more to encourage growth and job creation. Which is exactly what Speaker John Boehner, R-Ohio, Senate Minority Leader Mitch McConnell, R-Ky., and other GOP leaders did on Tuesday, when they sent Bernanke a letter warning him not to try any new attempts to boost growth.

“We submit that the board should resist further extraordinary intervention in the U.S. economy,” the Republicans wrote, “particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action, and quantifiable benefits to the American people.” Later, they added that “we have seen no evidence that further monetary stimulus will create jobs.”

If that’s true, the GOP leaders aren’t looking very hard: Research from the Federal Reserve Bank of San Francisco suggests recent “extraordinary” monetary policies – two rounds of quantitative easing – have boosted employment. 

It’s also fairly clear, to even the most conservative economists, that recent indicators provide an overwhelming “case for economic action.” As for articulated goals, Operation Twist appeared to be succeeding in pushing down long-term interest rates soon after its announcement.

So the real issue here isn’t whether the Fed is pursuing effective policies to promote job growth – it’s whether Republicans believe that, even at a time when 14 million Americans are looking for work, the Fed should be promoting job growth at all, if there’s a risk that its policies could spur future inflation.

If Boehner and his fellow leaders remain so concerned about inflation that they’re willing to let unemployment hover near double digits, they have a recourse: They can pass a law trimming the Fed’s mandate to inflation only.

Plenty of Americans – including some economists and many financial-services executives – believe the threat of accelerating inflation down the road should override any more attempts to boost employment via monetary policy. If Republicans agree, they should stop sending letters, start scheduling votes on the Fed mandate, and steel themselves for the very public debate that’s sure to follow.