Fed bashing, a pastime as old as the Federal Reserve System itself, is taking a strange and perhaps foreboding turn in Congress this year. An unusual coalition of reformers, including segments of the small business lobby, is attempting to get Congress to assert its influence over monetary policy and to chip away at the Fed's long-sacred independence -- and all this during the nation's strongest economic recovery in three decades. The reformers may not achieve their goals in 1985, but the fact that they are gathering political clout in the midst of sunny economic times may mean that the days of an autonomous Federal Reserve are numbered. When the recovery fizzles, and cries for easy money abound, as they do in downturns, the Fed could be in serious political trouble.
The immediate impetus for the reform movement in Congress is the deepening crisis in the heartland farm economy. While Wall Street's bullishness about the current investment climate was reflected in new stock market highs during the winter, thousands of family farmers and small agricultural suppliers still found themselves locked in one of their worst times since the Great Depression. Many other small businesspeople are grumbling, too, as they are forced to borrow at rates exceeding 13% at a time when inflation is only 4%.
The Fed's tight money policy, aimed at holding inflation in check, has contributed to these record-high real interest rates; it has also contributed to the strong dollar, which has crippled agricultural export markets. Hoping to turn up the political heat, hundreds of farm-state legislators descended on Washington this spring, demanding aid. Instead, they got slapped on the face -- twice. President Reagan called the farm-state emissaries' proposal a "budget-buster," and vetoed a proposed aid package on live television. At a House oversight hearing, Federal Reserve Board chairman Paul Volcker told the legislators, "[The farm economy is] nothing that can be papered over with monetary policy. . . . There are sectors of the economy that are doing well. You've just got the wrong end of the balance."
That left the Midwesterners angry and frustrated. "It could well be that this is the time for a serious reassessment [of the Fed]," warned Rep. Jim Leach (R-Iowa). Rep. Byron Dorgan (D-N.Dak.), went a step further -- he drafted legislation for introduction this spring that would strip away much of the Fed's fiscal autonomy.Dorgan wants to turn over full control of the Fed's budget to Congress, make the Reserve Board chairman's term parallel with Presidential terms, and name the Treasury Secretary as an ex officio member of the Federal Open Market Committee (FOMC), the arm of the Fed that sets monetary policy.
Dorgan, raised in the traditions of prairie populism, finds himself among strange bedfellows in his crusade against the Fed, which has long been regarded by small farmers as a capricious citadel of Eastern power. Joining him are such right-wing supply-siders as Rep. Jack Kemp (R-N.Y.), who helped author Dorgan's most recent reform bill. The supply-siders have stepped up their criticism of the Fed lately, because they fear that Volcker's unwavering battle against inflation will choke off the recovery and discredit President Reagan's economic program. The glue that holds this bizarre coalition together is interest rates. As long as Volcker resists pressure to ease credit, the farm-state liberals and supply-side conservatives will continue to attack the Fed's independence.
The new coalition reflects important changes in the political and economic environment in which the Fed operates.Perhaps never before during a strong economic recovery has the Fed had to deal with so many destabilizing domestic and international economic problems: a strong dollar, an enormous U.S. trade deficit, a yawning Federal budget deficit, high real-interest rates, and a long list of shaky debtor nations. In an increasingly international and interdependent economy, the political consequences of monetary policy are much more severe, as the Fed is now discovering.
Fed-busters in Congress know that the central bank is walking an ever more precarious tightrope. "If this recovery starts to unravel in late '85 or '86, then you're talking about real trouble for the Fed," says a Capitol Hill staffer who worked on the Dorgan bill. "We went through [efforts to increase congressional control over the Fed] for the first time during the '82 recession. And it really scared the Fed. Now the bills are already drafted and ready to go."
In large measure, it was grass-roots pressure caused by high interest rates, and a record number of small business bankruptcies that spurred Congress to attack the Fed's autonomy during the 1982 recession. No bills were passed then, but the growing threat of legislation caused the Fed to sharply ease credit, which helped spur the recovery. The Fed's only real defense against populist efforts to exert more control over monetary policy is just that strategy -- preemptively easing credit before legislation can pass. "We bend in the direction of congressional concerns," admits an FOMC member. "As the concern develops to the point where it becomes a major theme in the Congress, then [we feel] that represents the will of the public." Next time around, small business will likely play an even greater role in pressuring the Fed, because battered export markets and persistent high interest rates during the present recovery have focused attention on the Fed's relentless tight money policy.
In the next few years, protecting the Fed's independence may prove too much even for the stoical chairman Volker. If it does, small businesspeople and small farmers will share in bringing about one of the most important political changes in more than a decade.