Fed Fight May Poison Fiscal Deal

“So this, along with Supreme Court appointments is probably as important a decision as I make as a president.”

-- President Obama at a Friday press conference talking about nominating a new chairman for the Federal Reserve in a press conference Friday.

The posturing for the September battles over debt and spending is getting more aggressive. Democrats are pushing for more of both, while Republicans are trying to hold the line on demanding spending limits in exchange for more borrowing.

A combination of tax hikes, spending caps and modest improvement in the economy have helped to drive this year’s deficit to the lowest point since 2008. The current year deficit is forecast to be less than $700 billion. Though the sum is astronomical by historical standards, President Obama and his team are arguing that the first deficit under $1 trillion of his presidency is reason to believe that Democrats can now reject Republican demands for further spending limits. But increasing the debt unconditionally is a nonstarter among conservatives.

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The growing consensus in Washington is that the fiscal status quo can and should be maintained. Conservative economists Glenn Hubbard and Tim Kane argue in the New York Times today that both parties miscalculated in the deficit deals that led to the current tax hike-plus-sequester plan.

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And it’s true that neither spending caps nor tax hikes on top earners have done the damage predicted by opponents. And a recent bipartisan deal on student loans plus emerging agreements on how to spin down mortgage giants Fannie and Freddie and address the pension debacle at the Postal Service suggest that there is an appetite for something that would avoid the cliff diving that the president and conservative Republicans seem to be preparing for. As George Will points out, there’s even some traction in the Senate for a deal to fix the tax code.

Whether the chances of a government shutdown are higher or lower than they were before (Power Play would suggest that Republican preoccupation with the president’s health law actually improves chances for a deal since there’s less attention being paid to the actual debt deal), there is going to be one helluva fight over the Federal Reserve.

Current Chairman Ben Bernanke is set to leave office in January and the president is very publicly mulling a replacement. Liberals are eager to see Obama appoint former San Francisco Fed Chairwoman Janet Yellen to the top spot in hopes of her expanding or at least maintain the central bank’s $80 billion monthly cash pumping rather than Clintonite Larry Summers, feared by liberals to be a closet inflation hawk. But that family squabble doesn’t even scratch the real conflict here: Whatever happens on the debt and spending side, the loose monetary policy at the Fed has become a flashpoint on the right.

Liberals discount conservative anxieties about the possibility of runaway inflation with all of this money being pumped by the central bank (Paul Krugman has a conniption on that point today.) But this is deadly serious stuff for Republicans, who are increasingly alarmed that the Fed-based stimuli of the Obama era are leading to an eventual currency crash.

The problem with pumping money is that there might be very few warning signs before the dollar hit the skids. It’s sort of like jaywalking – Just because someone has crossed the street illegally 100 times doesn’t reduce the chances that he will get splattered by a cement truck on the 101st try. Democrats can say that there hasn’t been much inflation, but that doesn’t mean there won’t be.

While Democratic and Republican lawmakers are working feverishly to find a deal that will allow the government to get over the Oct. 1 cliff, Obama’s Fed pick could upend the whole deal.

If the president plays to his base by picking a proponent of continued currency pumping, Republicans are sure to be more demanding about debt and spending on the budgetary side. The Fed is a big deal for the 2016 Republican nomination, so it’s not a topic Obama can wave away.

Obama has done a good job of setting up Summers to seem like a centrist choice and a continuation of Bernanke’s easy money policies but not expanding them. Picking Summers now would probably smooth the path for an eventual fiscal deal. If the president doesn’t pick him, it will be a strong signal to Republicans that the president doesn’t care what they think and welcomes another round of brinksmanship.

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Chris Stirewalt is digital politics editor for Fox News, and his POWER PLAY column appears Monday-Friday on FoxNews.com. Catch Chris Live online daily at 11:30amET  at http:live.foxnews.com.