The most important news to emerge from the Federal Reserve’s June meeting and Chairman Ben Bernanke’s Wednesday testimony before Congress is that the central bank is open to taking further action to juice the economy if the recovery remains stalled, and that the Federal Open Market Committee is divided on what to do. Another round of bond-buying, known as quantitative easing, remains unlikely and any final decision lies with the cautious Bernanke, who expressed uncertainty that the economic benefits of further stimulus would outweigh the risks. I’ll let others mull the potential efficacy of QE3 and pose a slightly different question: Does any of this matter to President Obama?
If anyone has a stake in the economic vitality of the nation, it’s Obama. Let’s go ahead and assume that the President believes the following: A second term is desirable and the economy is a significant variable in his re-election. The stalled recovery can’t be 100% explained by transitory effects or structural shortcomings. Barring extensions of a payroll tax cut and unemployment benefits, Congress is unlikely to enact further fiscal stimulus and the President’s hands are tied. And expansionary monetary policy has a potential to improve economic outlook.
Given those beliefs and the assumption that there’s negligible domestic political drawbacks to the enactment of further Fed action — global politics is a very different story — why wouldn’t Obama be interested in giving monetary stimulus full hearing? By that I mean: Why is Obama comfortable with leaving two long-vacant seats on the Fed’s Board of Governors to gather dust?
As the failed nomination of Peter Diamond showed, the confirmation process is not a quick or easy one. Any change would take months. But there is a plausible scenario in which a divided FOMC weighs action in the face of continued economic lethargy later this year or next. “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told Congress on Wednesday. If that debate is to happen, why not lend more voice to central bankers who share Obama’s outlook? A Republican blockade to Senate confirmation might be insurmountable, but why not at least give two names for consideration?
Again, the final decision on whether or not to act monetarily ultimately falls to Bernanke. I’m sure Obama has no interest in complicating the chairman’s already delicate position atop the Federal Reserve. Pulling the trigger on QE3 would entail more risk for Bernanke, who can’t afford to have the central bank appear ineffectual, than for Obama, whose political fortunes aren’t tied to such perceptions. All the more reason why the situation is strange; the President is almost powerless to effect change in the all-important economy for the rest of his first term, if not the remainder of his presidency. Why neglect any avenue of influence, however narrow it might be?