Federal Reserve Chairwoman Janet Yellen is not pleased with the highway spending bill moving toward passage in Congress because of the money it would take from the central bank’s capital account.
“This concerns me,” Yellen said Thursday morning during congressional testimony. “I think financing federal fiscal spending by tapping the resources of the Federal Reserve sets a bad precedent and impinges on the independence of the central bank. It weakens fiscal discipline.”
The highway funding bill announced this week, a compromise between the House and Senate, would draw down much of the Fed’s capital surplus account and cut the dividends it pays its member banks, which are technically its owners.
The provision is just one of several measures lawmakers are considering that would affect the Fed’s operations, but the most likely to become law, with Congress considering it this week.
Yellen noted that drawing down the Fed’s surplus capital account wouldn’t actually free up new money for Congress to spend, in the estimate of the Congressional Budget Office. Instead, liquidating it would only reduce the expected future payments from the Fed to the Treasury. The Fed earns money on its $4.5 trillion portfolio of bonds.
Having surplus capital, Yellen explained, helps the Fed by removing doubt that losses on that portfolio could affect its member banks or its remittances to the Treasury.
The account, currently at $30 billion, “enhances the credibility and confidence in the central bank,” Yellen said.
