Will a Republican Congress Smack Down the Fed?

Expectations are high that the Republicans will take control of the House of Representatives in the mid-term elections two days from now, and perhaps the Senate as well. Victory celebrations, however, will last only one night. The next morning, the victors, whoever they may be, will face an ornery electorate clamoring for action.

Action will be hard to come by. With a Democratic White House, and the Democrats either controlling the Senate or holding almost half its seats, gridlock is inevitable. Further fiscal stimulus is off the table. Tax "policy" will consist of chaos and lunacy. Congress will regress from its recent productive (albeit controversial) mode to its norm of swapping trash talking soundbites and issuing self-congratulatory press releases, while incessantly searching for the next photo op and more campaign contributions.

The only active part of the government, in regard to economic policy, will be the Federal Reserve. The worst kept secret in Washington is that next week the Fed will renew its program of quantitative easing, possibly beginning with the purchase of $500 billion of Treasury securities. Although Chairman Bernanke and other Fed officials wrap this policy in elegant bureaucratese, it amounts to printing money, pure and simple. Roll the lettuce out of the printing press and move it off the loading dock. Grumpy old skeptics mutter under their breath about inflationary risk, and point to gold's escalating price. But senior Fed officials repeatedly offer solemn assurances that they've got things under control.

Newly elected and emboldened Republicans, especially the ideologues, may see the Fed as a convenient target. It failed to spot the mortgage crisis until things blew up, then bailed out Wall Street at the expense of Main Street, next successfully lobbied for increased power under the Dodd-Frank financial regulatory reform bill, and more recently missed the foreclosure mess. Some conservatives, economists and others, view the Fed's easy money policy as the primary reason for the past decade's asset bubbles, and the Fed's regulatory failings as crucial reasons why those bubbles were so damaging. A few far right wing purists would find the printing of money to stimulate the economy indistinguishable from sorcery.

Majority control of the House would give the Republicans control over committee hearings. Some of them might delight in holding Congressional hearings where they could berate Fed witnesses on C-Span and score points with their constituents. Since the Fed may be the only hope Democrats and President Obama, in particular, would have for a revival of the economy, some Republicans might see advantages to intimidating the central bank. The Fed, by law, is independent of Congress. But the law and political reality don't necessarily correspond closely. The Fed might be subdued by a barrage from Republican/Tea Party evening news headliner wannabes. If that happens, expect a lot of asset classes--stocks, bonds, gold and other commodities--to fall in value. The financial markets now depend heavily on government intervention to sustain prices. As a policy matter, that's not a good thing. But it's not easily undone. If political pressure smacks down the Fed, it could also smack down the markets.