Capital Hill has been exploring the potential for a political backlash against renewed Federal Reserve quantitative easing with a focus on one particular set of risks: a jump in oil prices even as the economy continues to sputter.
Oil prices have climbed back to $83 a barrel, fueled in part by a Fed-inspired weaker dollar, though demand growth in China and other emerging markets is the biggest reason.
Despite the diverse set of drivers, a spike in prices at the pump with unemployment stuck near 10% could help mobilize resentment against Fed reinflation efforts.
The small-government wing of the Republican Party and Tea Party movement would surely pounce on such an unintended consequence of quantitative easing to drive home an emerging critique that Fed money-printing is linked at the hip with big government and big deficits.
The case against more Fed purchases of Treasury debt was spelled out clearly in a new piece by Reagan budget director David Stockman, a deficit hawk but not a movement conservative:
Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don't matter because the Fed is financing them for free.
While big government is a Republican rallying cry, the truth is that the party hasn't united behind any plan to substantially cut deficits.
Nor is it likely to as long as the Fed continues to print money, argue Jeffrey Bell and Sean Fieler of the American Principles Projects in a new Weekly Standard piece.
"By focusing solely on fiscal policy Republicans are setting themselves an impossible task," they write.
"Republicans will be operating in a monetary environment that precludes the possibility that the federal government can ever run out of money to spend, which makes it virtually impossible to control spending. . . . Our system of limited government cannot include an institutional printing press that stands ready to absorb any unwanted government issuance of debt."
Chairman Ben Bernanke seems to recognize the danger that the Fed may be boxed in by fiscal policy. In a speech this month, he called for a prompt focus on long-term deficit reduction to avoid "economic and financial instability."
The risk of a political backlash against the Fed "” which would, in effect, be a challenge to its policymaking independence "” is heightened due to President Obama's inattention to the deficit at the outset of his term.
If long-term deficit-reduction measures were prioritized, then Fed purchases of Treasuries "” and even further fiscal stimulus such as a payroll tax cut "” might be seen as providing a bridge to fiscal sustainability. Now the Fed, while trying to play the role of white knight, is seen in some circles primarily as an enabler.
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