Ben Bernanke, chairman of the Federal Reserve, has warned that Congressional meddling in the affairs of the central bank could alarm the financial markets and send interest rates higher.
In a rearguard action against moves to subject the Fed to greater scrutiny, Mr Bernanke used his twice-yearly testimony on Capitol Hill yesterday to defend the independence of monetary policymaking and the bank's interventions in the capital markets.
A majority of members of the House of Representatives are promoting a Bill that would subject the Fed's actions in these areas to audits by the Government Accountability Office, the investigative arm of Congress. "Financial markets, in particular, likely would see a grant of review authority in these areas to the GAO as a serious weakening of monetary policy independence," Mr Bernanke told the House Financial Services Committee. "Because GAO reviews may be initiated at the request of members of Congress, reviews or the threat of reviews in these areas could be seen as efforts to try to influence monetary policy decisions. A perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability."
The Fed has come in for criticism from a variety of quarters in Congress, sometimes for being too free of political oversight as it launched extraordinary measures to tackle the credit crisis, sometimes for working so closely with the US Treasury that it has seemed to be a tool of political decision-makers. Opponents, particularly Republicans, have coalesced around the proposal to grant the GAO more power over the Fed.
Members of the Financial Services Committee yesterday questioned Mr Bernanke on how the Fed is planning to extricate itself from the credit markets when its extraordinary measures are no longer needed.
Mr Bernanke set out the Fed's "exit strategy", which will allow it to pull back the more than $1 trillion it has pumped into the markets to keep credit flowing and to push down market interest rates. These include raising the rate of interest the Fed now pays on the deposits that banks are required to hold at the Fed. He said he was confident the Fed had enough tools at its disposal to quickly raise market interest rates when the economy was improving.
And in a survey of the US economy, he said there were signs that housing market activity, business confidence and consumer spending were all stabilising, although unemployment would stay high for "the long haul".
A new leg down in consumer spending is the biggest risk to a recovery, he said, but he welcomed consumers' newfound prudence and their decision to use a greater proportion of their incomes to pay down debt.
Household borrowing fell to 128 per cent of the average family's after-tax income in the first quarter, from a record 133 per cent in the same period a year earlier, according to data compiled by Bloomberg. "We've never seen a pullback like this," Goldman Sachs chief US economist, Jan Hatzius, told the news organisation. "We are seeing an adjustment, and it's very painful and there's a lot of collateral damage."