I've suspected this for a few months now, but Dallas Fed president Richard Fisher's recent speech — which Paul Krugman takes apart here — may provide some actual evidence to back up my suspicions. One big question has been why the Fed doesn't seem willing to do more to stimulate the economy, even in the face of persistently high unemployment and looming deflation. Krugman has suggested that the Fed is afraid to try something unorthodox because no one knows how well it would work, and failing would be very embarrassing for the Fed. I think that's part of the story.
But I also suspect that the Fed is reluctant to do more because the last time they went out on a limb and took extraordinary/unorthodox actions — bailing out AIG, establishing currency swap lines, supporting the money market funds — they were eventually savaged by politicians and the press for those actions. (And, mind you, the multiple investigations into the AIG bailout have turned up nothing legitimately untoward.) Even though the Fed was right to do those things, and they undoubtedly helped stave off a complete financial meltdown, grandstanding politicians and commentators badly misrepresented the Fed's actions in a (partially successful) effort to "rein in" the Fed's authority and autonomy. Reining in the Fed's ability to undertake extraordinary actions during a crisis became an explicit goal of both Republicans and Progressives during the financial reform debate.
If this is the reaction the Fed can expect when its extraordinary/unorthodox actions work, who knows what would happen if the Fed tried something unorthodox and failed. And I think this scares the Fed. They don't want to establish any unorthodox programs, for fear that politicians eager to ride a wave of populist sentiment will make another run at the Fed's authority and independence (or even the Fed's existence).
Just look at this passage from Richard Fisher's speech:
[W]e at the Fed must continue to comport ourselves in a manner that exorcises any lingering worries about our willingness to brook any political interference with our commitment to fostering price stability and maximum sustainable employment. We delivered on our duty to restore liquidity to the commercial paper, asset-backed securities, interbank lending and other markets. We then closed out all of our extraordinary liquidity facilities, doing so without costing the taxpayer a dime (imagine that: a government agency that closes programs after they have outlived their usefulness!). We have worked hard to earn the respect of the marketplace and of the nation, and we dare not risk it at a time when there is so much uncertainty elsewhere.Translation: our earlier extraordinary actions, while successful, led to a good deal of threatened political interference, and we "dare not risk" raising the ire of populists in Congress again.
Of course, I don't think this justifies the Fed's inaction — what's the point of having the independence they're so jealously guarding if they're not going to actually use it? Politicians are always going to say idiotic things, and populists are always going to claim that the Fed is in bed with the big banks. But if the mere threat of "political interference" is enough to circumscribe Fed policy, then is the Fed really "independent" in the first place?