Changes to the Federal Reserve’s role in setting monetary policy – by restricting the central bank’s investment powers, tweaking the board’s approach to the economy, and making the Federal Reserve system more “public” – were discussed by four economists during a hearing Tuesday before the House monetary policy and trade subcommittee.
The hearing was centered on three pieces of legislation that propose to reform the Fed in a variety of ways. The bills – the Independence from Credit Policy Act of 2017, the Congressional Accountability for Emergency Lending Programs Act of 2017, and the Monetary Policy Transparency and Accountability Act of 2017 would make changes ranging from the investment authorities of the Federal Reserve to the structure of the regional banks.
Micky Levy, Managing Director and Chief Economist, Berenberg Capital Markets, agreed that the Fed’s actions taken during the financial crisis helped stabilize financial markets and averted “an even deeper and more damaging recession.
However, he asserted that sustained “artificial low interest rates and massive asset purchases” well after the start of the economic recovery was questionable. He criticized the Fed’s action since the recovery began: “It has not stimulated faster growth and has distorted economic and financial performance, and poses sizeable risks.
One way to answer that criticism, according to Andrew T. Levin, Professor of Economics, Dartmouth College, is to make the Fed “a fully public institution whose decision-makers are public officials selected through open and transparent processes.” Levin said ownership of the 12 regional Federal Reserve Banks should be transferred from commercial banks to the public.
“By following procedures already in place for adjusting the shares of individual member banks, the process for carrying out this transition would be incredibly straightforward, and have no effect on the current value of U.S. government debt or the size of the Fed’s balance sheet,” he told the subcommittee.
Jered Bernstein, senior fellow at the Center on Budget and Policy Priorities said that the Fed’s independence is essential ingredient to central bank’s timely, efficient, and effective functioning. However, he said reforms of the bank should be considered. “But the first step must be for the bank to recognize that they do not have the luxury to maintain a view that recognizing and deflating systemic bubbles are outside of their purview, and that their job is solely to mop up the damage,” he said.
Charles I. Plosser, visiting fellow at the Hoover Institution of Stanford University recommended restricting the Fed’s investment powers strictly to U.S. Treasuries – which he said would limit the Fed’s ability to engage in credit allocation and reduce the incentive for political interference.
“A Treasuries-only policy would prevent the Fed from purchasing private sector assets that would offer some firms, sectors, or asset classes preferential treatment and expose the taxpayer to credit risk,” Plosser said, adding it would also prevent the Fed from rescues or bailouts of creditors on its own discretionary authority as it did during the financial.
“Moreover, it would rule out the discretion of the Fed to acquire agency securities and municipal bonds, as well as private securities such as equities and corporate bonds. These limitations would strengthen Fed independence by reducing the incentives for political interference and lobbying by interested parties,” Plosser said.