With Europe falling deeper into crisis and Congress paralyzed, only one institution may have the flexibility to try to keep the U.S. economic recovery on track: the Federal Reserve.
But the Fed faces a daunting burden. Any new action could provoke tough political criticism. Republicans, in particular, have expressed deep concern about the measures taken by the Fed to support the economy — and could be doubly upset if new efforts goose the stock market and are perceived to work in favor of President Obama’s reelection.
“The Fed is going to try to do the right thing,” said Vincent Reinhart, a longtime Fed economist and now top U.S. economist at Morgan Stanley. But, he added, “The headline they most worry about is ‘The Fed acts to help the incumbent.’ ”
The central bank fiercely guards its independence from politics. But its unprecedented efforts over the past four years — rescuing banks and printing trillions of dollars in new money to support the economy — have raised concerns among conservatives about a rising risk of runaway inflation and a weakened dollar.
In recent months, amid improving economic data, the Fed sent signals that it was pausing its campaign of economic stimulus. But with the escalating crisis in Europe and the sudden slowdown in U.S. economic growth — marked by last week’s report of paltry job growth — many economists say the Fed is likely to reconsider measures to support growth.
Fed Chairman Ben S. Bernanke could provide a hint of whether new stimulus is likely when he testifies before Congress on Thursday.