Polarization has become a pervasive and much-noted feature of American politics. The two major parties are sharply divided over issues ranging from taxation to gun control to climate change, and much political discussion is characterized by considerable acrimony.

Such tensions spill over even into areas of life not tightly linked to the political fray. The Wall Street Journal reported last year that matchmaking services had found a growing unwillingness among clients to date members of the opposite party.

The recent fiscal cliff negotiations underscored the elusiveness of agreements between Democrats and Republicans, and the resulting deal set the stage for further showdowns over fiscal matters in the early months of this year.

The chasm between the parties tends to obscure some more subtle features of the political environment, such as underlying tensions within both parties and points of similarity among factions that might lead to some collaboration across party lines.

Let us look at some such internal disagreements and potential realignments and their potential to shake up the policymaking scene during the current Congress and the second term of the Obama administration. 

Monetary Flux

The Federal Reserve has drawn intense Republican criticism in recent years. In 2010, Congressional leaders took an unusually interventionist approach by sending a letter to Chairman Ben Bernanke pressing the Fed to desist from further monetary stimulus.

In last year’s presidential primaries, hopefuls including Mitt Romney complained monetary policy was too loose. Rick Perry warned further easing would be “almost treasonous.” Ron Paul’s push to “end the Fed” was a keynote of his campaign, and Newt Gingrich praised Paul for being “right about the Federal Reserve for 25 years.”

The politics have been shuffled somewhat by the Federal Reserve’s stance, announced in December, of continuing bond purchases as long as unemployment stays above 6.5% and inflation is projected at below 2.5%. On one hand, such easing runs contrary to Republican calls for tight money and fears of inflation. On the other hand, it jibes well with another traditional Republican priority, for monetary policy to be more rule-based and predictable.

The two tendencies—for monetary policy to be tight, and to follow explicit rules—have often gone together. In a purist form, they combine in advocacy of a gold standard, an arrangement that would mean not just far tighter money but eliminating Fed policymakers’ discretion (plus, as Paul and others desire, eliminating the Fed altogether).

In adopting an expansive monetary policy, but one that follows rules, the Fed has moved somewhat in a direction prescribed by economists and pundits in a school of thought dubbed “market monetarism.” Market monetarists such as Bentley University economist Scott Sumner call for the Fed to target nominal GDP—in effect, to use monetary stimulus to seek steady growth even if some inflation arises as well.

Market monetarism has intellectual roots in the monetarism spearheaded by Milton Friedman in the latter decades of the 20th century, but seeks to circumvent problems of managing the money supply by focusing on the overall economy instead, and using futures markets as a gauge of the effectiveness of the Fed’s policies.

Market monetarism and the Fed’s partial embrace of it have won praise from various points on the ideological spectrum. The American Enterprise Institute’s James Pethokoukis, seeking to promote nominal GDP targeting as “the new gold standard,” has been one such enthusiast in the conservative camp. 

However, there remains strong resistance to any monetary expansion effort among many conservative analysts and policymakers. Moreover, such aversion strikes a populist chord with the Republican base, which has become a target audience for TV and radio ads touting gold and silver as safeguards against inflation and economic instability.

The influence of market monetarism may soften Republican criticism of the Fed going forward, although some contentiousness is sure to arise as Bernanke’s term draws toward its January 2014 close. (He has indicated a reluctance to be reappointed.) The political salience of all this will depend largely on inflation. If prices surge, expect tight money to be an extremely prominent Republican theme in the 2014 and 2016 elections.

Wall Street Critics

Relations with Wall Street are another area in which internal tensions within the parties may reshape political alignments and priorities.

Among congressional Democrats, a tough tone toward financial services industries can be expected. Sen. Elizabeth Warren’s election and seat on the Senate Banking Committee have given her a high-profile platform for criticism and scrutiny of financial institutions. On the House side, Rep. Maxine Waters’ rise to ranking member on the Financial Services Committee also signaled potential clashes with Wall Street.

However, some Democrats may make improving relations with the financial sector a priority, especially as fundraising kicks in for the 2016 presidential cycle. Prominent prospects for the Democratic nomination—Vice President Joe Biden, Secretary of State Hillary Clinton and New York Gov. Andrew Cuomo—have histories of substantial support from financial industry executives.

The last election cycle saw expanded ties between the Republican Party and financial professionals. Figures compiled by the Center for Responsive Politics show that Mitt Romney raised $21,033,028 from donors in the securities and investment industry, more than three times President Obama’s total of $6,146,701. By a broader measure covering donations from all finance, insurance and real estate industries, Romney led by an impressive $57,414,549 to Obama’s $20,000,930.

However, Republicans may take from Romney’s defeat a lesson that there are significant political liabilities in being perceived as too close to Wall Street. Louisiana Gov. Bobby Jindal embraced that concern in a mid-November interview with the website Politico: “We’ve got to make sure that we are not the party of big business, big banks, big Wall Street bailouts, big corporate loopholes, big anything,” he said.

How such sentiments will translate into policy proposals remains to be seen. But it is plausible that there will be significant divisions among Republicans over questions of financial regulation, with some calling for tougher rules and others rejecting “overregulation.” 

At present, congressional Republicans have shown considerable resistance to regulatory expansions under the Dodd-Frank framework, as for example when Reps. Spencer Bachus and Jeb Hensarling, respectively the outgoing and incoming chairman of the Financial Services Committee, recently called for a delay in implementing the Volcker Rule.

However, some effort to forestall future bailouts through regulatory changes could emerge as a key Republican cause. A push to downsize the largest financial institutions through fees or caps—an idea broached by some Republicans, including Jon Huntsman in his 2012 presidential campaign—may gain some traction. If so, it would spark new divisions within the GOP as well as between Washington and Wall Street.