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Economy in Congress’s Hands As Fed Runs Out of Bullets

Wednesday, 21 Sep 2011 | 5:08 PM ET

Ben Bernanke took a lot of flack from politicians ahead of the central bank’s statement on Wednesday.

But now after the Federal Reserve chairman downgraded the economic outlook and initiated a Treasury-buying program in an attempt to keep longer-term rates down, it’s Congress that is on the hot seat now.

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“Mr. Bernanke wants to be seen to be doing something, but his hand is not on the fiscal policy lever,” wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics. “We expect the Fed's actions to have very little visible effect on the economy, because the level of interest rates and the shape of the curve are not the key constraints on growth.”

Four top Republican leaders sent a letter Monday to Bernanke asking the central bank to refrain from any more extraordinary monetary actions because it wasn’t clear whether they were helping or hurting the economy. Texas Governor and presidential candidate Rick Perry called Bernanke’s actions “almost treasonous” last month.

“It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate,” said the letter from the GOP congressman including House Speaker John Boehner, in a historically rare shot at the politically neutral Fed.

Perhaps realizing the firestorm it could cause, Bernanke did refrain from announcing a third round of quantitative easing Wednesday, instead announcing a so-called Operation Twist. The Fed will sell short-term Treasuries and use the proceeds to buy government securities with longer maturities in an attempt to flatten 10-year and 30-year rates that are linked to key parts of the economy like mortgage loans.

The move was widely expected and largely uncontroversial because it won’t expand the Fed’s balance sheet (i.e. print money), but at the same time economists argued it would have little effect as a result.

“Like almost everyone else, we anticipate some variation on ‘operation twist’ will be announced by the Fed today,” wrote Andrew Barber, strategist for Waverly Advisors, in a note this morning before the Fed’s actions.“The notion that this supposedly ‘balance sheet neutral’ move will spur credit and capital spending to any great degree seems unlikely to us. We believe that this is simply one of the few politically viable levers that Bernanke & Co. still have available to pull while waiting for leadership and rationality to emerge from the legislative and executive branches.”

Earlier this month, President Obama presented legislation to Congress that he said will give a “jolt” to the economy.

While the plan included employer payroll tax cuts and incentives for hiring new employees, it was still expected to be challenged by Republicans because of the inclusion of stimulus spending on such things as an infrastructure bank and modernization of schools.

It’s now up to Congress to come to an agreement on this jobs package and the deficit reduction legislation that arose out of the bitter debt ceiling compromise.

Bernanke “will have to wait a long time,” wrote Barber.

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