WASHINGTON – A strong signal Friday from Chairman Ben Bernanke that more economic stimulus is on the way puts the Federal Reserve squarely in the middle of the fight for the White House in November’s presidential election.
Speaking at the Fed’s annual retreat in the Wyoming resort city of Jackson Hole, Bernanke offered a spirited defense of his unconventional efforts over the past three years to stimulate economic activity through the purchase of government and mortgage bonds. And he seemed to signal that more steps would be taken soon.
“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation,” Bernanke said. “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”
Financial markets took those words as a sign of new action, probably as early as the Fed’s next meeting of the rate-setting Federal Open Market Committee on Sept. 12-13.
“The odds of the Fed doing something in September are greater today than they were yesterday,” said Mark Vitner, senior economist for Wells Fargo Securities in Charlotte, N.C.
If the Fed does take action, it would come less than two months before the Nov. 6 election, and history suggests that what the Fed does during an election is always viewed through a political prism.
President George H.W. Bush famously blamed his 1992 re-election defeat to Bill Clinton on then-Fed Chairman Alan Greenspan’s failure to cut interest rates in a slow economy.
“Traditionally the Fed has been very careful about making moves near to an election, to avoid appearing like it’s making political choices and to avoid being a target,” said Douglas Elliott, a finance expert at the center-left Brookings Institution. “However, I do think present circumstances are ones in which the Fed really does have to do what it believes it has to do for the economy as a whole.”
Republicans have criticized the Fed’s use of bond buying to stimulate the economy, fearing it eventually will bring inflation. Another round of buying before the election could have the appearance of coming to the aid of President Barack Obama. The president, however, is unlikely to welcome Fed action because it cements a view that the economy is sagging under his stewardship.