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Economic Stimulus as the Election Nears? It’s Been Done Before

Binyamin Appelbaum|The New York Times

In September 1992, the Federal Reserve culminated a long-running effort to stimulate the sluggish economy by cutting its benchmark interest rate to 3 percent, the lowest level it had reached in almost three decades.

Chairman of the Federal Reserve Ben Bernanke speaks at the Federal Deposit Insurance Corporation headquarters, on February 16, 2012 in Arlington, Virgina.
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The Fed's chairman, Ben S. Bernanke, has argued in recent weeks that the economy needs help. 

The cut was avidly sought by the administration of President George H. W. Bush, but it was not enough to change the course of the presidential election. Years later, Mr. Bush told an interviewer that the Fed’s chairman, Alan Greenspan, had cost him a second term by failing to act more quickly and more forcefully.

“I reappointed him and he disappointed me,” Mr. Bush said.

On Thursday, the Federal Reserve is poised to announcethat it will once again seek to stimulate the economy in the middle of a presidential election season.

Fed officials insist that they do not consider politics in setting policy. But the imminence of the election makes it inevitable that the decisions reached by the Fed’s policy-making committee will be judged through a political lens.

Republicans have warned the Fed against taking action, and are seeking to impose new limits on its management of monetary policy. Some Democrats now echo Mr. Bush’s lament that new actions are too little, too late.

Experts say Fed officials are sensitive to the danger of a political reaction. But Randall S. Kroszner, a Fed governor from 2006 to 2009, said the Fed’s current chairman, Ben S. Bernanke, has concluded that the best defense of the Fed’s independence is to demonstrate its value by reaching decisions on the economic merits, then offering clear explanations to politicians and the public.

“Any decision the Fed will make will make someone unhappy, but what you want out of an independent agency is a careful deliberative process,” said Mr. Kroszner, a professor of economics at the University of Chicago Booth School of Business.

“Providing as much substantive economic explanation as possible for the actions that the Fed is taking, that’s the best way to maintain the Fed’s independence,” he added.

Mr. Bernanke and other officials have argued in recent weeks that the economy needs help, and that the Fed still has the means to stimulate growth. Officials also are concerned about the combination of federal tax increases and spending cuts scheduled to take effect next year.

In a reminder of the government’s fiscal problems, Moody’s Investors Service reiterated Tuesday that it could downgrade federal debt if Congress did not reach a debt reduction deal. Interest rates on federal debt remain near record lows despite a downgrade last year by Standard & Poor’s, but a second downgrade could force some investors to reduce their holdings of Treasury securities.

Mr. Bernanke outlined the actions that the Fed was most likely to take in a speech last month at a conference at Jackson Hole, Wyo. The central bank could announce a new round of asset purchases, expanding its balance sheet for the third time since 2008. It also could announce its intent to keep its benchmark interest rate near zero beyond late 2014. Both are methods of reducing long-term interest rates, and encourage borrowing and riskier investments.

While some analysts have argued that the Fed is less likely to act in an election year, history offers evidence to the contrary.

The Fed has announced policy changes in September or October during 10 of the last 15 presidential election years, dating back to 1952. During the last presidential election, the Fed slashed interest rates repeatedly as it responded to the financial crisis. In 2004, the Fed raised rates in June, August and September.

“There is plenty of precedent for Fed action ahead of a presidential election,” Credit Suisse said in a research note reviewing that history.

The decisions have always been subject to political pressure. The central bank’s independence was never intended to be complete. The Fed’s governors are appointed by the president. Its chairman has lunch regularly with the Treasury secretary and meets occasionally with the president. Congress dictates the Fed’s mission and requires it to report regularly on its actions.

The Fed, then-chairman William McChesney Martin Jr. told Congress in 1957, “should be independent — not independent of government, but independent within the structure of government.” That meant, he said, having the freedom necessary to decide how best to meet the goals of national economic policy.

It has won that much autonomy only gradually. When Arthur Burns became Fed chairman in January 1970, President Richard Nixon said at the swearing-in ceremony, “I respect his independence. However, I hope that independently he will conclude that my views are the ones that should be followed.”

Richard Nixon and Arthur Burns in 1968, before they ascended to higher offices.

He was not joking. Two years later, Mr. Nixon pressured Mr. Burns to help the economy by printing vast amounts of money, contributing to an era of crippling inflation.

Beginning in the 1980s, Paul A. Volcker and his successor, Mr. Greenspan, successfully established the benefits of independent monetary policy in reducing the rate of inflation, giving the Fed more leverage to resist White House pressure.

During that same period, presidents and their advisers gradually stopped talking in public about monetary policy, concluding that it was counterproductive because the Fed was then forced to respond by demonstrating its independence.

The victory remained partial. When Leon Panetta, then White House chief of staff, said publicly in 1995 that the Fed should cooperate with efforts to revive the economy, his comments were quickly disavowed. But the Clinton administration privately pushed Mr. Greenspan to stimulate growth ahead of the 1996 election and rewarded those efforts by nominating Mr. Greenspan for a new term.

The current White House says that it does not comment on monetary policy. Mr. Bernanke met only three times with President Obama last year, and most recently met with the president at the end of May, although he continues to meet regularly with Treasury Secretary Timothy F. Geithner. Even Congressional Democrats have generally avoided public calls for the central bank to take new action.

Republicans have been openly critical. Mitt Romney, the Republican Party’s presidential nominee, has pledged to replace Mr. Bernanke. But in recent weeks Mr. Romney also has seemed to take a more measured tone in his remarks. He told Fox News last week that he doubted the benefits of any new Fed policies.

“I don’t think there’s any action that they are going to take that will have an immediate impact on the economy,” Mr. Romney said.

Mr. Bernanke has simply repeated the Fed’s long-standing mantra that it does not listen to politicians nor think about politics.

“Our job is to do the right thing for the economy irrespective of politics,” Mr. Bernanke said earlier this year. “We’re not paying any attention to election calendars or political debates. We’re looking at the economy.”