New Washington Divide: Fed Vs. Congress

House Chamber
Tom Williams | Getty Images
House Chamber

The most interesting divide in Washington this week is not between Republicans and the Democrats, it’s the yawning gap between "stimulators" at the Federal Reserve and "non-stimulators" in Congress.

On Capitol Hill, “stimulus” is a dirty word these days. Newly energized Republicans came to power after a campaign largely spent denouncing President Obama for what they called his failed economic stimulus efforts.

And at the White House, Obama and his team are so politically burned by the election and boxed in by the new House majority that they couldn’t propose new stimulus measures even if they wanted to.

But over at the Fed, “stimulus” is known as “QE2,” or the second round of so-called quantitative easing. And Fed Chairman Ben Bernanke does not have to run for reelection.

So leave it to Bernanke to ride to the rescue of a paralyzed Washington, announcing Wednesday that he would pump an additional $600 billion into the economy, thereby sending the stock market into paroxysms of delight on Thursday.

In Washington, people talk about what’s happening "at both ends of Pennsylvania Avenue" as a short hand for the differences between Congress and the White House. But maybe it is time for a new phrase—what’s happening at both ends of Constitution Avenue, from the Capitol dome to the modernist headquarters of the Fed, 20 blocks away.

The gap between those two ends of Constitution Avenue grew much wider on Tuesday, with the election of a slew of Tea Party-backed members of Congress, just one day before Bernanke rolled out hundreds of billions of new dollars from the Fed.

The most powerful of those will likely be Kentucky Republican Sen.-elect Rand Paul, a long-time critic of the Fed, and the son of Texas Rep. Ron Paul, who penned a book called “End the Fed.” During the campaign, Rand Paul blasted the Fed, arguing, “when the Fed lowers interest rates by creating more money, not only does it devalue the money you currently have in your pocket, but it also leads to the boom-bust cycle.”

And on Thursday, the elder Paul, who will chair a key monetary policy subcommittee in the new Congress, surprised a largely Fed-loving Wall Street by giving an interview to Reuters in which he, too, slammed Bernanke’s actions, saying that the Fed is “totally out of control.”

“I think they're way too independent. They just shouldn't have this power," Rep. Paul said. “It’s an outrage, what is happening, and the Congress more or less has not said much about it.”

Rand Paul (R)
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Rand Paul (R)

Another Tea Party-affiliated member of Congress, Michele Bachmann, (R-Minn.), wrote a letter to Bernanke urging him not to engage in quantitative easing at all: “There can be little doubt that a second round of quantitative easing would represent a near-emergency intervention by the Federal Reserve and a signal of duress about the future of our economy,” wrote Bachmann, who announced a bid for a Republican leadership post in the wake of Tuesday’s election.

Her letter spelled out the philosophical difference between the two sides of Constitution Avenue: “I think a second round of quantitative easing is clearly less preferable than improving our nation’s economy through responsible fiscal policy that consists of decreased federal spending and lower rates of taxation,” Bachmann wrote.

Wall Street is already keeping a close eye on that ideological divide. The Washington analysis firm ISI Group told its financial clients this week that more quantitative easing “could prompt more oversight and rarely seen political pressure against easier monetary policy. For now, the GOP leadership is unlikely to weigh in against QE2, but some rank–and-file Republicans will.”