The Financial Services Subcommittee on Monetary Policy and Trade has held a hearing to examine legislative proposals intended to increase the accountability and transparency with respect to monetary policy and the operation of the Federal Reserve System. “Examining Federal Reserve Reform Proposals,” held on July 22, 2015, looked to consider if the economy performs better when the Fed follows a rules-based approach to monetary policy versus improvisational policy.
“This hearing provides us with another opportunity to examine how the Federal Reserve conducts monetary policy and why the development of these policies is in desperate need of transparency. The Fed’s recent high degree of discretion and its lack of transparency in how it conducts monetary policy demonstrate that not only are reforms needed, but more important that reforms are necessary,” said Subcommittee Chairman Bill Huizenga (R-Mich). Huizenga stated that since the Dodd-Frank Act was passed, the Fed has continued to expand its authority and power beyond its original legislative authority.
Bill would amend Federal Reserve Act. One of the proposals presented was a discussion draft of a bill by Rep. Huizenga that would amend the Federal Reserve Act to establish requirements for policy rules and blackout periods of the Federal Open Market Committee (FOMC), to establish requirements for certain activities of the Federal Reserve Board, and to amend Title 31, United States Code, to reform the manner in which the Federal Reserve Board is audited.
The proposal would do the following:
- explain differences between the course of monetary policy and a reference policy rule;
- require the Fed to conduct cost-benefit analyses when it adopts new rules;
- require the Fed to disclose the salaries of highly paid employees;
- provide for at least two staff positions to advise each member of the Federal Reserve Board, and require Fed employees to abide by the same ethical requirements as other federal financial regulators;
- reform the “blackout period” governing when Federal Reserve Governors and employees may publicly speak on certain matters;
- alter the membership of the FOMC and reform the Fed’s emergency lending powers under Section 13(3) of the Federal Reserve Act; and
- require that the FOMC set interest rates on balances maintained at a Federal Reserve Bank by a depository institution and enhance the Government Accountability Office’s authority to audit Federal Reserve operations.
Commission to study monetary policy. The second proposal, H.R. 2912, the “Centennial Monetary Commission Act of 2015,” introduced by Rep. Kevin Brady (R-Texas), would establish the Centennial Monetary Commission to study monetary policy, including:
- the historical monetary policy of the Fed;
- the various operational regimes under which the Federal Reserve may conduct monetary policy;
- the use of macro-prudential supervision and regulation as a tool of monetary policy; and
- the Lender-of-Last-Resort function.
The Commission would also be charged with recommending a course of United States monetary policy going forward and must report to Congress its findings, conclusions, and recommendations by Dec. 1, 2016.
Congressional authority. The witnesses seemed to mostly agree that Congress has the authority to change the structure of the Fed. Dr. John Cochrane, Senior Fellow at the Hoover Institution, said in his testimony that “[i]t is wise for Congress and the Federal Reserve to rethink the fundamental structures under which the Fed operates.”
Cochrane pointed out that “the massive expansion of Fed responsibilities, the many new tools it is now using, and in particular the temptation to use direct regulatory control to achieve nearly unlimited economic objectives, strike me as the most important topics for a discussion about rules, independence, mandates, and accountability.”
Don’t erode Fed authority. Dr. Donald Kohn, Senior Fellow, Economic Studies, at the Brookings Institution, also testified on the proposed legislative changes applying to the Fed. Kohn stated that he does not agree that “something has been seriously amiss with the way the Federal Reserve has carried out the responsibilities Congress has given it.” Kohn said that, while not perfect, “The Federal Reserve, working in part under the guidance of the Congress in Dodd Frank, has greatly toughened and improved its regulation and supervision of the institutions for which it is responsible, and the financial system is safer than it has been for many years.”
According to Kohn, the Fed has already been adapting its monetary policy strategy and communications, and he stated, “I do not believe that major changes have been identified that would make the Federal Reserve a significantly more effective public policy institution.” Kohn also indicated that the FOMC has taken a number of steps to increase the predictability and transparency of its actions, especially over the past 10 years.
Kohn did allow that there could be “further improvements to goals, structure, and decision-making processes” within the Fed. However, he said that the existing monetary policy committee has a “panel rooted in partisan politics, not expertise, and its make-up is strongly tilted to one side.”
“I believe that public support for the Federal Reserve in our democratic society requires that the authority of the Board not be eroded,” he concluded.
Fed would still have independence. According to Dr. John Taylor, Professor of Economics at Stanford University, “the finding that predictable rules-based monetary policy is essential for good economic performance comes from research by many people and from practical experience over many years in the United States and other countries.” Taylor said his research over four decades also supports this view.
Taylor also believes that “clear public strategy” would help the Fed from sacrificing its independence by preventing policy makers from “bending under pressure.” Taylor expressed his belief that under the proposal, the Fed “would choose and describe its own strategy … The Fed could change the strategy if the world changed. It could deviate from the strategy in a crisis if it explained why. It would still serve as lender of last resort or take appropriate actions in the event of a crisis. Moreover, a policy strategy or rule does not require that any instrument of policy be fixed, but rather that it flexibly adjusts up or down to economic developments in a systematic and predictable way that can be explained.”
Analysis of proposals. Dr. Paul Kupiec, Resident Scholar at the American Enterprise Institute gave testimony analyzing the legislative proposals. Kupiec said from his review of the Fed’s history, “it is clear that, from time to time, the US Congress finds it necessary to re-examine the Fed’s mandate, powers, and responsibilities, and to revise legislation appropriately when appropriate.”
Kupiec identified potential problems with the proposed legislation as written and gave suggestions of how to amend language and tighten requirements, and he also mentioned issues he believes merit further consideration or clarification, as well as practical considerations.
This article previously appeared in the Banking and Finance Law Daily.
