Federal Reserve Chair Janet Yellen has tried to repair damaged relations with Congress during her first seven months in office. The fix-up isn’t going very well.
Republicans on the House Financial Services Committee started the year promising a series of inquiries into the nation’s central bank. New legislation aimed at reducing the Fed’s discretion on monetary policy and bank supervision has been proposed. A bipartisan group of 15 House and Senate members sent a letter to the Fed, asking it to clarify how it would use its emergency lending authority in another crisis.
The efforts signal growing discomfort with policy makers’ unusual reach in financial markets and their expanding regulatory powers.
The Fed is “moving into new territory,” said Representative William Huizenga, a Michigan Republican, whose exchange with Yellen at a July 16 hearing turned tense, as each briefly spoke over the other. “They don’t feel like they need to explain it to us.”
Yellen has worked hard at reconciliation after relations soured under her predecessor, Ben S. Bernanke, who declined to comment. His unprecedented actions during the financial crisis — including an $85 billion rescue of insurer American International Group Inc. — raised concerns the central bank was growing too powerful while resisting scrutiny of its actions.
She sat for more than five hours of testimony at her first semi-annual appearance before the House committee and has supported changes, at the request of Democrats, in the way the Fed handles enforcement actions.
Still, interviews with members of Congress and their current and former staff show the distrust that sprouted during the crisis has taken deep root, especially among Republicans, who could have a Senate majority after November’s midterm elections. Some legislators say the Fed has confused its independence on monetary policy with independence from their oversight, an attitude they resent.
Huizenga’s office said the Fed recently took six months to respond to questions on the Volcker Rule, which limits risky trading by banks.
“Getting ignored on the legislative side and then being beaten about the head any time you want to question what they are doing — it’s an arrogance that comes out there that is stunning,” he said.
Lawmakers return from summer recess this week for their final legislative session before the elections. Fed Governor Daniel Tarullo will testify before the Senate Banking Committee tomorrow on the implementation of the Dodd-Frank Act. House Financial Services Committee Chairman Jeb Hensarling, a Texas Republican, has said he will use September to focus on a bill aimed at ensuring big banks aren’t too big to fail, which could also address the Fed’s emergency-lending authority.
The Fed’s independence depends on legislative consensus. Policy makers get their goals from Congress, along with the powers and tools to achieve them, which lawmakers can modify or take away.
The Fed is independent from the budget process because it funds itself from returns on the bonds it holds. Heads of the 12 Fed banks can’t be removed from office by Congress or the president because they are elected by regional boards. Finally, the Fed’s monetary-policy decisions are shielded by law from congressional audit.
Outside of those categories, Fed independence “is a pretty thin reed,” said Sarah Binder, a senior fellow at the nonpartisan Brookings Institution think tank in Washington, who is writing a book on the central bank’s historical relationship with lawmakers. “Even to the extent that there is formal basis for it, it is within Congress’s bounds to rein them in.”
With Republicans expected to maintain their House majority in the mid-term elections, a net gain of six Senate seats would give the party control of both chambers of Congress for the last two years of Barack Obama’s presidency.
Even though Obama has veto power, legislation demanding accountability will cause “the Fed to pay more attention to inflation, avoiding a persistent rate above its own 2 percent target,” Martin Feldstein, a Harvard University economics professor and former chairman of the White House Council of Economic Advisers, wrote in a July 23 Project Syndicate column.
Huizenga and Representative Scott Garrett, a New Jersey Republican, sponsored a bill this year that would, among other things, require the Federal Open Market Committee to describe a strategy or rule for how it determines monetary-policy decisions and to testify on supervision.
Yellen opposed the measure in the testy exchange with Huizenga during the July hearing, saying “it would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that.”
“You show respect when you answer questions given to you in a forthright manner; you show respect when you answer a question in a timely manner,” Garrett said in an interview, adding that this legislation is “just the beginning.”
Another bill with 52 co-sponsors by Representative Kevin Brady, a Texas Republican, would make stable prices the Fed’s primary goal, subordinating its full-employment mandate.
Republican control of the Senate would mean Richard Shelby of Alabama probably would lead the Senate Banking Committee, which oversees the Fed. He has decades of experience on the committee and is an example of how Republicans have turned on the central bank.
In 2005, he supported Bernanke’s nomination as chairman, saying he “may well be the finest monetary economist of his generation.” By 2010, he opposed Bernanke’s reappointment in an 1,800 word statement criticizing the Fed’s “history of failure in supervision and regulation.”
He also opposed Obama’s 2010 nomination of Nobel-prize winning economist Peter Diamond to serve as a Fed Board governor. Diamond withdrew, citing Shelby as “the leading opponent” in a New York Times opinion column.
He voted against Yellen’s nomination as chair and, in 2010, her nomination as vice chair, citing in both cases “deep concerns about Dr. Yellen’s Keynesian bias toward inflation as a member of the Federal Open Market Committee and her poor record of bank regulation as President of the San Francisco Fed.”
In an interview, Shelby was asked how responsive Fed officials have been to Congress. Twenty-five years ago, he said, he would have defended them against meddling.
“But I am telling you, the Fed needs to be audited” because of the risks involved in its operations now, he said, mentioning its $4.4 trillion balance sheet. “I used to think they don’t need to be audited, but I think I was wrong.”
Shelby’s change in attitude didn’t come out of nowhere: The central bank initially refused requests from him and Connecticut Democrat Christopher Dodd, then-chairman of the Senate Banking Committee, to reveal the names of counterparties who benefited from the Fed’s AIG rescue loan in 2008. The Fed also resisted his staff’s requests to find out more about U.S. bank exposure to the European debt crisis in 2010.
The Fed under Bernanke also fought and lost a lawsuit by Bloomberg LP, the parent company of Bloomberg News, to reveal the names of banks that borrowed from its discount-window lending program during the crises. And it rebuffed requests by Senator Orrin Hatch of Utah, the senior Republican on the Senate Finance Committee, for information about contingencies and risks associated with a possible default on Treasury securities during the 2011 debt-limit impasse.
Michelle Smith, a Fed board spokeswoman, declined to comment for this story.
Bernanke started his tenure at the Fed with an explicit mission of pulling back the veil on monetary policy to bolster accountability. He boosted the Fed’s publication of economic forecasts to four times a year from two and made the inflation goal numerically specific at 2 percent. The statement issued after each policy meeting became more descriptive, and he began holding press conferences after policy meetings for the first time. If Congress wanted to talk to Bernanke, he was usually available.
Monetary-policy transparency, however, isn’t the same as being responsive to oversight, congressional officials said in interviews, and when it has come to specific questions — such as the one on a Treasury default — the Fed has often delayed, resisted or failed to respond.
Even if none of the new legislation moves forward, the measures still reflect concern about the Fed’s expanding powers. Its annual stress tests allow regulators to influence private bank board decisions on how much cash to return to shareholders. The Dodd-Frank Act extended its supervisory reach to non-bank financial companies such as General Electric Capital Corp. and Prudential Financial Inc.
On monetary policy, the Fed will transact with money-market mutual funds, which it doesn’t regulate, to help manage its short-term policy rate.
“The challenge obviously is making sure the Fed is more accountable, making sure they are more responsive,” said Representative Patrick McHenry, a North Carolina Republican. “It’s really about the size of the balance sheet, the lack of transparency and the enormous power they yield.”
While Democrats haven’t sponsored any Fed-related bills, they have pressured the central bank in letters and hearings to change. Yellen now holds board votes on large-bank enforcement actions after a request from Massachusetts Senator Elizabeth Warren and Maryland Representative Elijah Cummings.
Last year, Senator Sherrod Brown, an Ohio Democrat, began an inquiry into banks’ physical commodities businesses, such as oil storage or aluminum warehousing. The day before a hearing this past January, the Fed issued a press release saying it was seeking comment on the possibility of additional restrictions on the activity.
Brown questioned this sudden interest in a rule, saying he was “incredulous” at the speed at which it was done, and he criticized the Fed for not providing more information on banks’ commodity holdings so Congress and other regulators could analyze the problem.
“I think that we’re all unhappy with the Fed on different issues, but I think she’s making a real attempt to do a couple things,” Brown said about Yellen. “She will work with Congress better than her predecessor.”
© Copyright 2021 Bloomberg News. All rights reserved.