The Senate’s top lawmaker on financial affairs took a step toward an overhaul of the Federal Reserve Tuesday.
“It’s entirely appropriate that Congress periodically review the Fed’s structure and its authorities,” said Sen. Richard Shelby, R-Ala., the chairman of the Senate Banking Committee.
If changes are needed, Shelby said, they will be made. He explained that Tuesday’s hearing was part of a larger examination of the need for reform, and that he had reached out to the 12 regional Federal Reserve banks for input.
The central bank is an independent institution, Shelby said, but “such independence does not mean that it’s immune from congressional oversight.” In particular, he expressed a desire to demand more transparency from the Fed regarding its plans for shrinking its balance sheet, which has swollen from just over $800 billion before the 2008 financial crisis to roughly $4.5 trillion today as the the central bank has sought to stimulate the economy.
A few different proposals to change the Fed are being considered:
• The “Fed Audit” legislation introduced by libertarian Sen. Rand Paul, R-Ky. The bill, which has dozens of Senate supporters, would require the Government Accountability Office to conduct policy audits of the Fed’s monetary decisions. It is opposed by Fed Chairwoman Janet Yellen and most monetary economists, who warn that it could politicize monetary policy.
• A bill that passed the House Financial Services Committee last year that would require the Fed to specify a strategy for monetary policy, and then give an explanation to Congress when it deviated from the strategy. That legislation, which also is not liked by Yellen, has some support from outside economists. Former George W. Bush Treasury official and prominent Stanford economist John Taylor testified in favor of the measure Tuesday.
• An overhaul of the Fed’s structure, which involves a seven-member Board of Governors appointed by the president and 12 regional banks with presidents chosen by their boards of directors, who are typically local representatives of business, academia or other institutions.
Sen. Jack Reed, D-R.I., has proposed making the presidency of the Federal Reserve Bank of New York a presidential appointment subject to Senate confirmation. The New York Fed president oversees the big Wall Street banks, has a permanent voting spot on the Fed’s monetary policy committee, and is responsible for conducting the Fed’s monetary policy. Many members of Congress, especially liberals, have objected to the banks being regulated by the New York Fed playing a role in choosing their own regulator.
Richard Fisher, the outgoing president of the Federal Reserve Bank of Dallas, has proposed reducing the New York Fed’s influence relative to the other 11 regional banks.
The perceived closeness of the New York Fed to the banks it supervises has elicited concerns from liberals, especially from Sen. Sherrod Brown, D-Ohio, the ranking Democrat on the banking panel, Elizabeth Warren, D-Mass., and Jeff Merkley, D-Ore.
Speaking at Tuesday’s hearing, Stanford legal scholar Peter Conti-Brown testified that the regional bank presidents have the potential to “make policy and constitutional trouble,” and suggested that they all be chosen by presidential nomination or by the Board of Governors to increase the legitimacy of their roles.
