The Fiscal Pressures on the Fed

KC Fed President Hoenig believes that fiscal mismanagement is going to presure the FOMC to keep interest rates down. Reuters:

The ballooning U.S. budget deficit and growing mountains of federal debt will increase pressures on the Fed to hold interest rates low and make it harder to avoid inflation, a senior Federal Reserve official said on Tuesday.

“The current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long-term growth, and therefore is a threat to its independence as well,” Kansas City Federal Reserve President Thomas Hoenig said in remarks prepared for delivery to the Peterson-Pew Commission on Budget Reform.

Fiscal policymakers should opt for the difficult path of cutting spending and increasing revenues in order to rein in deficits, Hoenig said. U.S. fiscal policy must focus on reducing the debt buildup and its consequences, he said.

A debt rating agency said earlier this month that high U.S. budget deficits could put the country’s top-level debt rating at risk. While the Obama administration’s recently announced budget proposal would take a small step toward sustainable debt levels, more is needed to preserve the country’s Aaa rating, Moody’s Investors Service said.

Hoenig also said the suggestion by economists at the International Monetary Fund that central banks tolerate higher levels of inflation than they have in the past to gain more power to counteract economic shocks is worrisome and would send the economies down the wrong path.

The out of control spending isn’t the only thing pressuring the Fed though. Bernanke did not get reappointed because he was out of step with Obama’s policy goals and the president wanted a good adversary. This is not to say he is a lackey of the administration, but there certainly is going to be more political pressure on the Fed to ensure consumer spending power does not drop in an already tenuous economic situation.