Detractors from both major political parties are preparing legislation to rein in the powers of the Federal Reserve, moves that would test and potentially restrain its independence.
The proposals include ordering a broad audit of the central bank, including its secret policy making, and giving Congress the power to confirm or reject the president of the New York Federal Reserve Bank, one of the most influential.
“Given that the New York Fed is the one of the most powerful banking regulators in the world and supervises some of the country’s largest and most complex banks, someone at this institution needs to be directly accountable to the American people,” said Chip Unruh, a spokesman for Sen. Jack Reed of Rhode Island, a top Democrat on the Senate Banking Committee.
Reed will soon reintroduce a proposal to subject the nominee to head the New York Fed to Senate confirmation and periodic questioning by the Congress.
Along with its role in errors that led to the 2008 financial crisis, the New York Fed came under scrutiny last year when a former employee claimed she was wrongfully dismissed after alerting higher-ups to conflict of interest at Goldman Sachs. New York Fed President Bill Dudley had been Goldman’s chief economist.
In 2012, congressional investigators suggested the New York Fed knew large global banks were manipulating interest rates in Europe and Great Britain.
The Fed’s Board of Governors in November began a review on how large banks are supervised, and complaints have driven plans pushed by Republicans and liberal Democrats for a complete audit of Fed operations.
The Federal Reserve already is subject to some auditing by the Government Accountability Office under the revamp of financial regulation in 2010 known as the Dodd-Frank Act. The Fed has an independent outside auditor looking at its books, too.
But Fed deliberations over monetary policy, some of its lending to foreign entities as well as its discussions with foreign central bankers are generally off limits to auditors. The Fed views any audit of its decision making as political interference.
“Back in 1978, Congress explicitly passed legislation to ensure that there would be no GAO audits of monetary policy decision-making, namely policy audits,” Fed Chair Janet Yellen said in December.
“I’m very open to looking for ways ourselves to improve our communications and transparency, and working with Congress to do that,” she said. “But I would be very concerned about (legislative) actions.”
Since 1913, the Fed has used closed-door deliberations to conduct monetary policy, raising its benchmark interest rates when the economy gets too hot and inflation is a threat, and cutting them in a bid to spark activity when economic recovery loses steam. It has done so irrespective of whether a Democrat or Republican is in the White House, often to the ire of a sitting president.
Fed Chairman William McChesney Martin, for example, raised interest rates in 1965 despite objections from President Lyndon B. Johnson, who famously summoned him afterward for a browbeating at the presidential ranch.
Chairman Paul Volcker raised rates to double-digit levels to quash inflation in the early 1980s, even as President Ronald Reagan’s popularity sank and House Banking Committee Chairman Henry B. Gonzalez, D-Texas, tried to impeach Volcker.
The independence from political pressures is likely one reason why the U.S. economy has long enjoyed stability in prices when other countries don’t.
“Countries where there is high inflation almost always are places where the monetary authority is not independent,” noted Dean Croushore, an economics professor at the University of Richmond.
The new pressures for more political accountability will test Yellen.
“It will certainly create a bit of challenge,” said Nariman Behravesh, chief economist of forecaster IHS Global Insight. “She will be up in front of Congress a bit more than she had already been.”
The biggest challenge is an audit, which passed the House of Representatives in each of the last two Congresses but was not voted on by the Senate.
Vermont’s independent senator, Bernie Sanders, introduced the Federal Reserve Sunshine Act in 2009, which called for a full audit of the Fed by the GAO. Former Texas Republican Rep. Ron Paul introduced that same year the Federal Reserve Transparency Act, a similar bill. Sanders is now working on a measure to discourage conflicts of interest at the Fed.
Paul’s son Rand, now a Kentucky senator and potential GOP presidential candidate, has sponsored Fed audit legislation in the past, and his staff indicated late last year he will again introduce legislation.
Senate Majority Leader Mitch McConnell, R-Ky., has already said he will allow this legislation, expected to be introduced in coming weeks or months, to come up for a floor vote during the 114th Congress.
Even Fed supporters can envision more congressional oversight, perhaps the nomination of whomever the Fed chairman wants to pick to head the influential New York Fed.
“I can’t see any huge harm in that, but in terms of the audit, even some of the more conservative members of the FOMC probably also feel that the Fed needs to maintain its independence,” said Chris Varvares, senior managing director of Macroeconomic Advisers in St. Louis, referring to the rate-setting Federal Open Market Committee.
In a nod to congressional complaints, the Fed announced on Jan. 16 creation of a 15-member Community Advisory Council. It’s mission will be to discuss concerns of low- and moderate-income families.
AFL-CIO President Richard Trumka called creation of the council “an encouraging sign,” adding that “Wall Street has dominated the discussion of monetary policy for too long, calling for higher interest rates to choke off wage and job growth when working families are still trying to catch up.”