Opinions were split on how the Federal Reserve can (or should) be reformed during testimony before a House subcommittee, in consideration of several bills proposing changes to the central bank.
The hearing before the House monetary policy and trade subpanel focused on seven legislative proposals to reform the nation’s central bank; witnesses offered differing views of the viability of the proposals.
In summary, the seven proposals would:
- Create requirements for salaries, financial disclosures, and office staff for Fed governors;
- Establish a blackout period for public communications by the interest rate-setting Federal Open Market Committee (FOMC);
- Bring non-monetary, policy-related functions of the Fed board into the congressional appropriations process;
- Restore the rights of Class A directors (appointed by member banks) to vote for district bank presidents. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act removed the bankers’ say in selecting the Federal Reserve Bank presidents.
- Revise the membership of the FOMC to allow all district bank presidents to vote at every meeting;
- Require the FOMC to determine interest rates on balances held on deposit at the Federal Reserve System by member banks;
- Require the vice chair for supervision of the Fed Board to testify twice a year before Congress.
In noting the “wide range of proposals” that would change the structure of the central bank, Dean Baker – senior economist at the Center for Economic and Policy Research – called some of them “quite useful” in promoting transparency and accountability for the central banks.
However, he termed some proposals (such as giving bankers a say in voting for district bank presidents, and allowing district bank leaders to vote at every FOMC meeting) as aimed at placing “more control of the Fed in the hands of the banking industry, rather than officials appointed through the democratic process.” He said that approach seems at odds with recent trends both in the United States and the rest of the world.
“It is difficult to understand the effort to privatize the conduct of monetary policy and to turn over control of financial regulation to the industry that is being regulated,” he said.
On the other hand, Norbert J. Michel, director of the Center for Data Analysis at The Heritage Foundation, called for more accountability at the Fed.
“It is difficult to argue that the Fed’s recent policy actions accomplished anything other than saving a favored group of creditors at the expense of all others,” Michel said. “Rather than hold the Federal Reserve accountable for these mistakes, policymakers appear to have put even more faith in the Fed’s ability to influence interest rates and inflation, tame business cycles, and ensure the safety and soundness of financial markets. Congress can implement many different reforms that help hold the Fed more accountable, thus ensuring that the Fed conducts its business in a more transparent, neutral fashion.”
Alex J. Pollock, a distinguished senior fellow R Street Institute, generally agreed with Michel’s take, saying the central bank needs more accountability. “How should the Fed be accountable for its various judgments, guesses and gambles, and to whom? And at the same time, how should it be accountable for how it spends the taxpayers’ money and how it makes decisions,” he said.
George Selgin, director of the Cato Institute’s center for monetary and financial alternatives, focused entirely on the proposal to charge the FOMC, rather than the Fed Board, with official responsibility for setting the interest rate paid on banks’ excess reserve balances. “
“However, until or unless the Fed’s use of interest payments on banks’ reserve balances can be confined as described – as long, in other words, as adjustments to those payments continue to serve as an important determinant of the Fed’s monetary policy stance – the power to make those adjustments should rest solely with the FOMC, where it clearly belongs,” he said.
House subcommittee hearing: “A Further Examination of Federal Reserve Reform Proposals”