Republicans likely will use the vote on Janet Yellen to slam the central bank. GOP rhetoric vs. Fed policy reality

Republicans will use the expected vote this month on the nomination of Janet Yellen to chair the Federal Reserve as one more chance to slam the Fed’s easy money policies.

But there’s one big rub to their argument: Their predictions about the impact of these policies since they first began in late 2008 have been wrong so far.


Inflation has not spiked, and the value of the dollar has not collapsed. At this point, in fact, there are more worries about deflation than inflation.

But thanks to the tea party influence in the GOP — in particular the Fed-bashing Rand and Ron Paul wing of the party — ripping the Fed and the bigger role it is playing in the economy has become more a litmus test for party loyalty, regardless of whether the dire predictions have come true.

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“Republicans think it sells,” said Sarah Binder, a senior fellow at the Brookings Institution who has studied Congress’s relationship with the Fed. “They want to be on the right side of those movements that are coursing through the Republican Party at the real grass-roots level.”

Even the small handful of Republicans who say they will support Yellen, the Fed’s current vice chairwoman, have made it clear they are doing so despite their strong opposition to the central bank’s current stimulus program, known as quantitative easing, and that they hope as chairwoman she would quickly scale it back, despite Yellen’s public comments to the contrary.

“The market is totally dependent on QE like an addict is dependent on the drug supply,” said Sen. Mark Kirk (R-Ill.), who supported Yellen’s nomination in a Banking Committee vote, saying that while he is opposed the Fed’s stimulus policies she “has the intellect and experience” to lead the central bank.

Democrats and Fed supporters have eagerly pointed out that Republican predictions of what the Fed’s bond-buying programs will bring have not come true, with the annual inflation rate standing at 1 percent in October and should be dismissed.

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“Among some of the most critical Republicans, let me say politely that they are not exactly data-driven people,” said Jared Bernstein, a former economic adviser to Vice President Joe Biden and now a senior fellow at the liberal Center on Budget and Policy Priorities. “So while they may raise the issue of, say, inflationary pressures, they’re not really looking at the numbers, certainly not the way [Fed Chairman Ben] Bernanke or Yellen are.”

Republicans remain undeterred, seeing little evidence of a political backlash to beating up on the Fed, and they have a ready answer when questioned on why their gloomy predictions have not materialized: Just wait.

“There’s going to be a day of reckoning,” said Sen. Richard Shelby (R-Ala.).

Shelby and others argue that the trouble will start once the Fed tries to unwind the more than $3.6 trillion balance sheet it has built up in recent years by buying assets, such as Treasury and mortgage bonds, to keep long-term interest rates low to spur on spending and investment. Fed officials say they are confident they can manage, first, the easing back of its monthly asset purchases and then shrinking the portfolio without incident. Their attempt to do so will be closely watched.

“With regards to taxpayers and inflation, I think there is a potential and a breaking point — if I knew this I’d be as rich as Warren Buffett — but there’s a breaking point for when they can’t control interest rates,” Sen. Rand Paul (R-Ky.) said in an interview.

Yellen and her Fed colleagues agree with their critics that the central bank can’t continue buying big batches of Treasury and mortgage bonds indefinitely but argue that when to stop should be based on economic conditions — and, with unemployment high and inflation low, now is not the time to hit the brakes.

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Whether the off-and-on bond buying program can achieve much more on its own after five years is a question that continues to face the Fed, and Bernanke and other officials argue that fiscal policy emanating from Congress would be a more effective way to target problems in the economy.

Even as Republicans continue to strongly warn about inflation and a devaluing of the dollar, they have also started to make other arguments for why the Fed’s policies are doing more harm than good. Each argument has an appealing populist flavor.

A popular attack over the past year is that by keeping interest rates low, the Fed has enabled the growth in deficits and the overall debt because government borrowing is cheap, so there is no pressure to cut spending.

But the deficit is now dropping because of spending cuts, tax hikes and the recovering economy, showing that the allure of cheap borrowing hasn’t prevented Congress from cutting some fiscal deals.

Bernanke has dismissed the logic behind the charge.

“What’s the alternative?” he asked the House Financial Services Committee earlier this year. “If we raise interest rates substantially just to make it harder for the Congress to borrow, if at the same time we do damage to the economy and lower revenues and make the deficit even worse, I don’t see how that’s really helpful to our fiscal situation.”

Another recent critique emphasizes the party’s growing support for a more populist take on economic issues and a separation from the more pro-business and pro-Wall Street leanings of the past. The charge is that the Fed is doing little more than providing “sugar highs” for the stock market, which is soaring, benefiting rich investors at the expense of mom and pop savers.

“Ultra-low interest rates harm middle-class savers, seniors and retirees in Pennsylvania who rely on interest from their savings and pensions,” Sen. Pat Toomey (R-Pa.) said last month when announcing his opposition to Yellen’s nomination.

Democrats are pushing back, arguing that the Fed’s policies are helping the economy, which in turn benefits the middle class struggling to recover from the recession.

Yellen “recognizes middle-class families are still struggling to dig out of the hole the financial crisis created, and that now is no time for the Fed to pull back,” Sen. Elizabeth Warren (D-Mass.) said following the Senate Banking Committee vote on her nomination.

Whether the Fed’s policies will result in asset bubbles, such as an overheated stock market, is a charge that Fed officials say they are sensitive to, and the central bank has a spotty record when it comes to spotting bubbles, such as the housing boom that preceded the financial crisis.

Conservative groups are urging Republicans to keep up the criticism of the Fed beyond Yellen’s confirmation vote, arguing it can help in the upcoming midterm elections.

Richard Danker, economics director at the conservative American Principles Project, said the GOP has realized that easy money from the Fed is “totally at odds with their economic agenda.”

It “makes the economy more top-heavy — bond purchases help large corporations finance themselves — leaving small businesses at a disadvantage,” he said. “So there go limited government and broad-based prosperity.”

How much bashing the Fed’s monetary policies will resonate outside of the GOP base remains to be seen, but Sen. Joe Manchin of West Virginia, a moderate Democrat, felt nervous enough about the issue to vote against Yellen when her nomination was before the banking committee. Most other Democrats have been strong supporters of quantitative easing.

Both the economic and political debate over the Fed will enter a new phase early next year if, as expected, the central bank begins to decrease, or taper, its $85 billion a month in asset purchases. A strong jobs report released on Friday led many analysts to say that tapering will soon commence, possibly after a policy-setting meeting scheduled for later this month.

What happens when it does will serve as another fact check against whether Republicans’ warnings about the central bank’s aggressive policies come true as the Fed tries to show it can handle even a modest retreat.

The Fed “won’t be immune to the political backlash” from either party if scaling back the stimulus programs and unwinding its balance sheet end up harming the economy, said Deutsche Bank Chief U.S. Economist Joseph LaVorgna.

But, for Republicans, if tapering goes awry it may prove the rare opportunity where the party can say its warnings have proven prescient. And if it doesn’t go awry — the Fed-bashing will likely continue unabated.

“What concerns me is not the slow-term unraveling, but when it gets to be a panicky situation,” Paul said. “I really don’t want to see 2008 on steroids.”

Kevin Cirilli, Zachary Warmbrodt and Jon Prior contributed to this report.