NEW YORK – Federal Reserve Chairman Ben Bernanke's plan to rejuvenate the economy by having the Fed buy $600 billion in Treasury bonds is coming under renewed attack — this time from fellow Republican economists.
They argue that pumping many more dollars into the economy could eventually trigger inflation and weaken the dollar too much. The economists are making their case in a letter to Bernanke and in ads to run this week in the Wall Street Journal and the New York Times.
The Treasury bond purchases "risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," the economists wrote in their letter.
At the same time, their criticism risks pushing the Fed closer into Washington politics, where many fear the central bank's independence could be compromised.
The economists express doubts that the program will help the Fed achieve a primary goal: reducing unemployment, now stuck at a high 9.6 percent rate. And they think it will inject new risks into the global economy.
Bernanke, a Republican who was President George W. Bush's top economist before taking over the Fed in 2006, has signaled frustration over the still-sluggish economy and persistently high unemployment. Even though the recession has ended, the unemployment rate has been stuck at 9.5 percent or higher for more than a year.
In announcing the bond-purchase program Nov. 3, the Fed said it could lower long-term interest rates and stimulate stronger economic growth. Bernanke has said he thinks lower-interest loans would lead companies to borrow and expand. Cheaper mortgages would let more people buy or refinance.
Higher stock prices would boost the wealth and confidence of individuals and businesses, he has suggested. And spending would rise, lifting incomes, profits and economic growth.
But at a summit of world leaders in South Korea last week, China, Germany and other countries complained that the Fed's plan would give U.S. exporters a competitive price edge by flooding world markets with dollars.
Emerging economies like Thailand and Indonesia also fear that falling Treasury yields will send money flooding their way in search of higher returns. Such emerging markets could be left vulnerable to a crash if investors later decide to pull out and move their money elsewhere.
The letter from the 23 economists represents a new front in the attack on the Fed's bond-purchase plan. The economists who signed it include Douglas Holtz-Eakin, who served as a top policy adviser for 2008 Republican presidential candidate John McCain; John Taylor, a top Treasury Department official in the Bush administration; and Michael Boskin, chief economist to Bush's father, President George H.W. Bush.
In the letter, they told Bernanke the program should be "reconsidered and discontinued."
The existence of the letter was reported earlier Monday by the Wall Street Journal.
Responding to it, a Fed spokeswoman said: "The Federal Reserve does not believe it can solve the economy's problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sectors."
The Fed has said it will regularly review the program, under which the Treasury will buy $600 billion in bonds over the next eight months. The central bank left the door open to scaling back, or curtailing, the bond purchases if the economy performed better than expected — or buying more if the economy seriously weakened.
Treasury prices fell and rates rose for a third day Monday after the letter to Bernanke came to light. The sell-off reflected speculation that the Fed might not carry out the full $600 billion bond-buying program as planned. The yield on the 10-year Treasury jumped to 2.93 percent. That's its highest level since July, before the Fed began hinting it would take action to spur the economy.
Bernanke insists the Fed has the tools to safely soak up all the extra money pumped into the economy and to avoid unleashing any worrisome inflation.
Yet even within the Fed, some members have expressed uneasiness about the potential risks of the program and doubts about how much it will help the economy.
Kevin Warsh, who was among 10 Fed officials who voted for the $600 billion program, last week nevertheless expressed doubts about whether it would boost the economy. And he warned of "significant risks," including the potential for triggering excessive inflation later on. Warsh said the Fed might have to reconsider its program if the dollar continued to fall or if commodity prices continued to rise, raising inflation across the economy.
Critics inside and outside the Fed also worry that the latest intervention opens the central bank to criticism that it is printing money to pay for the government's debt. And, that, in turn, tarnishes the Fed's independence.
"This puts the Fed right back into the middle of politics," Holtz-Eakin said in an interview. "The risks of politicizing the Fed, running higher inflation and heightening international tensions are costs that outweigh the benefits."
Rep. Mike Pence, R-Ind., a critic of the Fed's bond-buying program, says he plans to introduce a bill that would change the Fed's mission to focus solely on keeping inflation in check. Currently, the Fed has a "dual mandate" from Congress: to keep both inflation and unemployment low. Pence said he worries that, among other things, the Fed's program would lead to a dangerous spurt of inflation.