Gridlock Is Good For Bernanke Dollar In Fight Over Rate Audits
Opposition in the Senate to a measure that would allow the Government Accountability Office to examine Fed interest-rate decisions is likely to doom the populist cause after it passed in the House Dec. 11, according to Gregory R. Valliere, a chief strategist at Potomac Research Group in Washington. Its defeat would remove a threat that might weaken the dollar while giving Bernanke, who testifies before Congress this week, a freer hand to raise rates as he seeks to unwind a $1 trillion expansion of credit, investors said.
“This may be one of the areas where gridlock is a positive for the markets,” said Valliere, who has covered federal issues for investors for more than 30 years. The audit proposal is “very unlikely” to pass this year, he said.
Passage during a period of continuing record budget deficits “would be very detrimental to the dollar and would steepen the yield curve, widen credit spreads and cause yields to shift higher,” said Anthony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co. in Newport Beach, California, which manages the worlds largest bond fund.
The U.S. Dollar Index, a gauge of the greenback against six major currencies, has gained about 3.5 percent this year, in part because investors expect the Fed to keep winding down stimulus and eventually raise interest rates.
Emergency Loans
The dollar strengthened last week after the Fed increased the rate on emergency loans to banks by a quarter-point to 0.75 percent, the first such move in the discount rate since June 2006, even as the central bank said the change didnt signal a shift in monetary policy.
Traders expect the benchmark federal funds rate to rise at least a quarter-point to 0.5 percent by year-end, based on futures on the Chicago Board of Trade. Economists predict the rate, which banks charge each other on overnight loans, will increase to 2 percent by September 2011, even as the unemployment rate averages 9.1 percent next year, according to the median estimates in a Bloomberg News survey conducted Feb. 4-9.
Bernanke, 56, won a 70-30 Senate vote last month for a second four-year term, the most opposition since the chamber started approving Fed chiefs in 1978. He will visit Capitol Hill Feb. 24-25 for semiannual hearings on monetary policy and the economy.
Maximum Transparency
“We will continue to work with the Congress to ensure maximum transparency of Americas central bank, without compromising our ability to conduct policy in the public interest,” Bernanke said Feb. 3 in comments to Fed employees after being ceremonially sworn in for the new term.
The audit measure would overturn a provision in a 1978 law that blocks the GAO from examining the Feds monetary policy.
Supporters of the provision prevailed in the House, attaching it — over Bernankes objections — as an amendment to a broad financial-service regulatory overhaul passed in December. The bill contains passages aimed at assuaging concerns it would interfere with monetary policy, such as a ban on examining unreleased minutes or transcripts of Fed meetings.
Similar proposals havent garnered enough support so far to pass in the upper chamber and are opposed by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, who is managing the Senates version of the financial legislation and will release a draft bill as soon as this week.
Very Concerned
Representative Ron Paul, the Texas Republican who introduced the measure and helped recruit 317 House co-sponsors, said in an interview that hes “very concerned” about Senate prospects for the provision. Even if it isnt included in the Senates version of the legislation, Paul, author of the 2009 book “End the Fed,” said he would press for it when House and Senate negotiators meet to reconcile differences between each chambers bills and draft a final version.
The matter might not be resolved this year and could be resurrected after Novembers midterm elections for roughly one- third of the Senate and the entire House. Dodd, 65, and other opponents of the audit measure including New Hampshire Republican Judd Gregg, 63, are retiring from the Senate, leaving a potential opening in 2011 for its main backers — Vermont Independent Bernard Sanders, 68, and South Carolina Republican Jim DeMint, 58 — to pick up more support.
More Scrutiny
Ultimately the Fed is likely to face more scrutiny because of voter anger and congressional concern about a lack of transparency in its bank bailouts and its use of taxpayer funds to aid financial firms such as New York-based American International Group Inc. At issue is how intrusive and intense the oversight will be.