Is an attack from Sarah Palin the best news the Federal Reserve could hope for?
Pimco's Paul McCulley thinks it may well be. He argues in a commentary posted Wednesday that a growing anti-Fed backlash is actually a sign that Fed chief Ben Bernanke’s unpopular policies are a good bet to actually work.
The recent uproar confirms that Federal Reserve policies amount to “acting irresponsibly relative to conventional wisdom,” McCulley writes. He deems this embrace of quantitative easing, the purchase of $600 billion of Treasury bonds over eight months, “precisely the right approach” for resuscitating an economy suffocating under an enormous debt burden.
It brings me great angst to observe professional critics – many of them acquaintances and friends of mine – rhetorically beating Fed Chairman Ben Bernanke about the head and shoulders for launching QE2. At the same time, the fact that Sarah Palin has joined the chorus brings me great joy. If what Ben is doing offends both the learned and the unlearned, then he is clearly acting unconventionally relative to orthodoxy. And this is good, very good.
It’s not just the domestic critics that McCulley shrugs off, either. He also says pshaw to those in foreign capitals who would whine that a weaker dollar makes their lives harder, boo hoo.
The Fed makes policy consistent with its legislative mandate handed down by the democratically-elected government of the United States. And that’s what the Fed is pursuing: mandate-consistent levels for inflation and the unemployment rate. This is as it should be.
The rest of the world should simply accept this outcome as reality, and adjust – or not adjust – their own domestically-oriented objectives and policies accordingly. Is there room for multi-lateral dialogue, perhaps even some degree of coordination, as various jurisdictions grapple with heterogeneous economic and financial exigencies? Absolutely. But that does not imply that the Fed should abdicate its responsibilities to pursue the mandate given to it by the American people. Pursuing that mandate is precisely what the Bernanke-led FOMC is doing.
Of course, praise for Bernanke is nothing new for Pimco. Last month Bill Gross spoke up for the Fed chief, saying the blame for the U.S. economic mess must be laid at the feet of voters and the politicians they elect rather than the nation’s financial firefighter in chief.
At the same time, another Pimco talker, Mohammed El-Erian, has laid out the case against quantitative easing, arguing it won't restart the economy but will leave already flush regions swimming in excess dollars.
McCulley concedes he has "serious gut pains when thinking about" the costs and benefits of the Bernanke approach at a time when the political will for further fiscal stimulus has evaporated and the Fed has yet to fully embrace inflation targeting.
But, he concludes, "that does not mean that one-hat QE2 will be ineffectual."