Federal Reserve Crisis: Should Congress Stop Relying On Fed?

Is the congress, yet again, looking up to the Fed to deliver the country out of its present crisis? Apparently it seems so. Going by the reactions, Bernanke’s pleadings with the Congress evoked little interest in prioritizing the nation’s economic crisis. Instead, the lawmakers insisted on talking about issues that are inconsequential to policy agenda. In other words, the congress is banking heavily on the Fed tobail the country out of its current malaise. The fact is, the Fed cannot do what the congress is empowered to do. At best the Fed can slow a de-leveraging which, without the backing of strong policies, can gnaw at the very foundation of the country’s economy. The need of the hour is constructive political decision across party lines. But if developments are any indication, the congress is refusing to wake up to the need.

The Fed’s hands are tied. The usefulness of traditional monetary policy tools has been blunted out. The only option left with the Fed is inject a dose of alternative measures such as additional purchases of securities, lower the rate of interest on excess reserves, or provide more discounts to boost market confidence. But, any of these measures can only have a temporary impact on the economy. With the congress remaining a mute spectator, unconventional measures is unavoidable. Such measures can erode the credibility of the Fed and lead to unintended consequences that can prove too damaging.

The Fed has run out of alternatives and knows that their measures are slowly being rendered ineffective. On the other hand they are aware that the congress is unwilling to act. So, in the coming days it is expected that the Fed would revise its growth forecasts for 2012. This in turn will raise expectations of more measures.

It’s time for the Congress to wake up and come to terms with reality. Banking on an increasingly ineffective Fed can only make matters irretrievable. The need of the hour is political interaction cutting across party lines. Given the impending elections, this cannot happen any time before. And if delayed action happens to sink the nation into shallow recession, the congress will have itself to blame.

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