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Fed Adopts Political Tactics on Critics

Faced with unusually sharp ideological attacks after its latest bid to stimulate the economy, the Federal Reserve now faces a challenge far removed from the conduct of monetary policy: how to defend itself in a hyperpartisan environment without becoming overtly political.

Caught off guard by accusations from Congressional Republicans, Sarah Palin, Tea Party activists and conservative economists, the central bank and its chairman, Ben S. Bernanke, are pushing back, making their case on substantive grounds but also haltingly adopting the tactics of Washington battle, like strategically placed interviews, behind-the-scenes assuaging of opponents and reaching out to potential allies on Capitol Hill.

The stakes are high. Last week, one House conservative announced legislation to strip the Fed of its mandate to promote jobs and have it focus solely on containing inflation.

The attacks, coupled with criticism from foreign officials, have introduced enough uncertainty into global financial markets to potentially undercut the Fed’s plan to drive down interest rates, which rise or fall as investors anticipate Fed action.

Ben Bernake with Chris Dodd
Bill Clark | Roll Call | Getty Images
Ben Bernake with Chris Dodd

Since the Nov. 3 announcement, Treasury yields have risen as the bond markets seemed to be doing what they normally never dare do: fight the Fed. The yield on the benchmark 10-year Treasury note, at 2.67 percent on Nov. 3, fell to 2.53 percent on Nov. 5. But then came a reversal that caught traders by surprise. The yield was up to 2.92 percent by Nov. 15, before falling slightly, to 2.80 percent on Monday.

Behind the scenes, Mr. Bernanke has signaled that he is steadfast on the Fed’s plan to buy $600 billion of government securities through June in an unorthodox effort to push down long-term interest rates and spur the anemic recovery. In doing so he is trying to make clear to the markets that the Fed will not reverse course unless there is a compelling reason to do so, like a big increase in inflation expectations or a sharp rise in commodity prices.

Whether the uptick in yields represents genuine market anxiety about the Fed’s inflation-fighting commitments, or the fact that the Fed’s policy has already been effective at accelerating the recovery, the attacks are a distraction and could hurt the Fed’s ability to set policy. “That is certainly the effect of Congressional criticism,” Alan Greenspan, Mr. Bernanke’s predecessor, said.

Mr. Bernanke, who unlike Mr. Greenspan shuns the Washington social circuit, lacks close ties to conservative Republicans, even though he was first appointed by President George W. Bush and served briefly as his top economic adviser.

But lately he has stepped up his outreach, meeting with members of the Senate Banking Committee and explaining the Nov. 3 decision in an opinion-page article and a speech.

But the efforts have only had partial success. After meeting with Mr. Bernanke on Wednesday, Senator Richard C. Shelby of Alabama, the senior Republican on the Banking Committee, said, “The bottom line is that the Fed is attempting to spur job growth because the Obama administration has done so much to inhibit it.”

Fed officials concede that they left an opening for their detractors by timing their latest move — the decision to resume the asset-purchase strategy known as quantitative easing— for the day after the midterm elections. Operating outside the political calendar, the Fed’s policy-making committee had long planned to convene Nov. 2 for two days.

The Fed had signaled its intentions to the markets. Starting in August, when it hinted that the recovery was so weak as to require additional support, stock prices rose and long-term interest rates fell in anticipation of the Fed’s announcement.

But Mr. Bernanke and other top officials, unaccustomed to partisan considerations, did not anticipate the political fallout.

“The fact that immediately after an election which was a historic rejection of American liberalism and the borrowing and the spending and the bailout agenda of the recent past, for the central bank, for the Federal Reserve, to unilaterally announce $600 billion in printed money going into the economy, I think is at odds with the goals of the American people,” said Representative Mike Pence of Indiana, who is the chairman of the House Republican Conference and has ties to the Tea Party.

Mr. Pence introduced legislation that would strip the Fed of one of its two legally mandated goals — promoting maximum employment — and have it focus on fighting inflation and preserving the value of the dollar.

Mr. Bernanke has relied on two aides, Michelle A. Smith, his chief of staff and spokeswoman, and Linda L. Robertson, a former lobbyist for Enron and Johns Hopkins, to manage his political messaging. Both worked at the Treasury Department during the Clinton administration and have had experience handling crises, though they probably could not have foreseen the intensity of the storm the Fed kicked up.

President Obama, who nominated Mr. Bernanke to a second term, has defended the Fed’s actions in the face of international criticism.

The Fed has taken criticism over the recession and Wall Street bailouts, but in the financial overhaul this year, it helped defeat proposals to strip away its power to regulate and supervise banks.

Mr. Bernanke, who had thought the worst was behind him, was unsettled by the suddenness of the recent attacks. He has said that the Fed was in a no-win situation; if it had not acted, it would have been criticized for ignoring the painfully slow pace of the recovery.

The situation forms an odd corollary to the early 1980s, when Mr. Greenspan’s predecessor, Paul A. Volcker, sharply raised interest rates, setting off back-to-back recessions in a painful but effective war on inflation.

Liberals attacked Mr. Volcker, a Democrat, as an inflation-fighting zealot who disregarded the plight of the unemployed. Now conservatives are portraying Mr. Bernanke, a Republican, as trying too hard to stimulate growth and underestimating the risk of inflation.

Several veterans of the Bush administration signed an open letter to Mr. Bernanke last week, saying the program should be “reconsidered and discontinued.”

They included John B. Taylor, a former Treasury under secretary, and Douglas Holtz-Eakin, a former Congressional budget director. The letter was the work of a new group, e21: Economic Policies for the 21st Century, led by Christopher Papagianis, a former Bush aide. Its chief supporters include David R. Malpass, who was a Treasury official in the Reagan administration, and Paul E. Singer, a hedge fund manager and prolific Republican donor.

Mr. Bernanke faces at least two years of scrutiny by a Republican-controlled House; the chairman of a subcommittee that oversees the Fed is likely to be Representative Ron Paul of Texas, a libertarian who wants to abolish the central bank.

“The Federal Reserve’s decisions are appropriately debated in the public forum and the Fed should explain and be held accountable for them,” said Donald L. Kohn, who retired this year as the Fed’s vice chairman. “But I have the sense that this is being turned into a partisan issue and that is worrisome to me.”

Mr. Kohn added, “The verbiage has gotten intense and extreme — out of line, in my view, with the decision itself.”

Mr. Greenspan, who recently suggested that the Fed was weakening the dollar, expressed sympathy for his successor. “The Fed in recent years has been facing far greater policy challenges than I, or my colleagues, had to confront during the whole of my tenure,” he said.

Graham Bowley contributed reporting from New York.

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