Fed Presidents Caution Against Monetary Policy Reform

Witnesses at a House Subcommittee on Monetary Policy and Trade hearing on Wednesday—two of which were current presidents of Federal Reserve banks—cautioned that any reform to the current Federal Reserve system would politicize the Fed’s decisions on monetary policy jeopardize the central bank’s independence when it comes to making monetary policy decisions.

In a hearing titled “Federal Reserve Districts: Governance, Monetary Policy, and Economic Performance”—the first hearing in nearly two months in the House Financial Services Committee—Richmond Fed President and CEO Jeffrey Lacker and Kansas City Fed President and CEO Esther George both warned of potential risks to the financial system if the current Fed system were to be reformed.

“The Fed’s public-private structure supports monetary policy independence by ensuring a measure of apolitical leadership,” Lacker said.

“The Federal Reserve’s unique public-private structure…is designed to provide a system of checks and balances,” George said. “Altering this public-private structure in favor of a fully public construct…risks putting more distance between Main Street and the nation’s central bank.”

The House of Representatives passed the FORM (Fed Oversight and Reform) Act last November, and House Financial Services Committee Chairman Jeb Hensarling (R-Texas) introduced the Financial CHOICE (Creating Home and Opportunity for Investors, Consumers, and Entrepreneurs) Act this past summer. Both bills contain proposals that would make the Fed more transparent.

Specifically, the FORM Act requires the Fed to transparently communicate its monetary policy decisions to the American people by requiring the Fed to generate a monetary policy strategy of its own choosing, in order to provide the American people with more transparency about the factors that lead to the Fed’s monetary decisions. The Act would also eliminate the restrictions on the Government Accountability Office’s ability to audit the Fed, allowing the GAO to conduct an audit of the Fed anytime there is a policy change.

Fed Chair Janet Yellen was vehemently opposed to the FORM act, writing a letter to the White House right before the bill passed in the House of Representatives, saying, “The bill would severely impair the Federal Reserve’s ability to carry out its congressional mandate and would be a grave mistake, detrimental to the economy and the American people.”

Monetary Policy and Trade Subcommittee Chairman Bill Huizenga (R-Michigan), who is also the sponsor of the FORM Act, said, “I know that a better way is available—one that reverses the increased centralization of monetary policy in Washington’s politicized Board of Governors, and restores the historic role of District Banks as a critical source of local economic information and an institutional source of support for sound monetary policy.”

The Subcommittee’s Republican majority claimed during Wednesday’s hearing that the Dodd-Frank Act, passed in 2010, weakened the Fed’s institutional foundation for price stability by preventing directors with experience in the banking sector from participating in the selection of Fed bank presidents; and proposals that would further politicize monetary policy would essentially turn the Fed’s district banks into politicized field offices for the central bank.

“As representatives of our region, we serve a limited yet crucial role. This includes providing detailed, systematic and real-time input about local economic conditions, which serves to help shape effective monetary policy,” said Robert G. Jones, Chairman and CEO of Old National BanCorp and former board director of the Federal Reserve Bank of St. Louis. “We also play a vital role in the business side of running a Reserve Bank, including management, strategic plans, operations, budgets and supervising internal audit functions.”