Jan. 27, 2010 – 1:40 p.m.

Fed Decision Lost Amidst Political Theater

As expected, the Fed did little to change its policy stance today, with rates left at near zero for "an extended period of time," and little new news on the Fed's mortgage buyback program. The Fed hopes to discontinue its purchases of mortgage-backed securities at the end of March. The recent weakness in home sales (including today's drop in new home sales) and ongoing problems in the mortgage market, however, are expected to force the Fed to rethink that decision at their next meeting.

There was one dissent by Tom Hoenig, the president of the Kansas City Fed, who is a hawk and wanted to drop the "extended period" language. This shouldn't be a surprise given the debate we have seen among members of the Federal Open Market Committee in recent months.

The more critical issue for the future of monetary policy is that the Fed maintains its independence, which is being challenged on all sides. I have kept relatively quiet on this issue thus far, but the time to speak has arrived. The political theater surrounding Bernanke's reappointment is a witch hunt, plain and simple. It is amazing how short the memories of those in Congress have become. The very political and economic system that brought them to this point might not have existed, if not for the actions taken by the Fed and Treasury to stabilize financial market conditions in the fall of 2008.

I recently sat down with Fed Governor Kevin Warsh at his office in the Fed in DC. He said (and I am paraphrasing) that you have to leave your politics at the door when you walk into the Fed, because politics can really undermine the quality of your policy decisions - especially when it comes to the economy. Congress should heed Warsh's advice.

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