The Federal Reserve has more to fear than just Rand Paul.
Members of the central bank, the White House and the private sector are speaking out this week against Paul’s legislation, which would subject the Fed’s monetary policy deliberations to a Government Accountability Office audit.
But with resentment of the 2008 bailouts still strong, Paul’s bill is not the only legislation lawmakers are considering that would rein in the Fed and limit its discretion to conduct monetary and regulatory policy.
And the threat is real: Only last month, President Obama signed into law a measure that requires at least one person on the seven-member Federal Reserve Board of Governors to have experience in community banking. That bill became law over Fed Chairwoman Janet Yellen’s objections when it was attached to a larger piece of legislation relating to a terrorism insurance program that the White House considered a necessity.
At least four legislative efforts could follow a similar path:
1. Audit the Fed
Paul’s legislation received a major boost Tuesday when Sen. Richard Shelby, R-Ala., expressed support for it and suggested that the Banking Committee that he heads would hold hearings on it.
“I, at one point in my career, was a big defender of the Fed. No longer… They ought to have transparency,” Shelby said, according to the Wall Street Journal.
But the bill was also dealt a setback when White House economic adviser Jason Furman indicated that Obama would strongly oppose an effort to audit the Fed, calling Paul’s bill “dangerous.”
The Fed is already well-audited, and “any additional legislation would be somewhere between superfluous and highly counterproductive,” Furman said on Bloomberg TV.
2. The FRAT Act
Favored by conservative Republicans in the House, the Federal Reserve Accountability and Transparency Act, or FRAT Act, would have a similar effect to that of the Fed audit, namely increasing oversight of the Fed’s monetary policy.
The FRAT Act would require the Fed to establish a rule guiding its monetary policy, explaining how it would change interest rates to respond to increases or decreases in inflation or unemployment. If the Fed departed from the rule, it would be subject to an immediate GAO audit and would have to report to Congress on why it deviated from the rule.
Testifying before the House Financial Services Committee last year, Yellen strongly objected to the bill, saying that it too would jeopardize the independence of the central bank and subject monetary policy to political pressure.
But the bill has more mainstream support than the Fed audit does. John Taylor, the prominent Stanford economist aligned with Republicans, testified in favor of it.
Allan Meltzer, an economist at Carnegie Mellon and Fed historian, said the FRAT Act improved on the audit by adding oversight regarding economic outcomes, rather than the tools used by Fed officials.
“I don’t think anybody in the country really gives a tinker’s damn as to whether the Fed uses a ouija board or throws corn in the air,” Meltzer said. “What they care about is: Do they control inflation and create employment?”
Last year, the FRAT Act cleared the House Financial Services Committee. It was reintroduced this year by Rep. Scott Garrett, R-N.J.
3. New York Fed reform
Some liberals in Congress would prefer to focus on the Federal Reserve Bank of New York, which has oversight of most big banks and is the most powerful regional Fed bank.
Sen. Bernie Sanders, I-Vt., previously a strong proponent of auditing the Fed, is focused now on reforming the New York Fed to prevent conflicts of interest, a spokesman for his office said.
In the past, Sanders has introduced legislation to ensure that bank representatives are not among those who choose the bank’s president. The current president, William Dudley, is a former banker at Goldman Sachs.
Liberals have long been skeptical of what they say are overly close ties between the New York Fed and the big banks it oversees. In November, senators hammered Dudley in a special hearing dedicated to investigating whether the regional bank was too close to the banks it regulates.
4. Legislation to curb the Fed’s bailout powers
Some Fed critics have said Congress did not go far enough in limiting the Fed’s power to conduct individual bailouts in the wake of the crisis, which saw the Fed prop up banks, mutual funds and other financial firms.
The 2010 Dodd-Frank financial reform law directed the Fed to write rules restricting its own ability to offer emergency loans to firms.
But when the Fed issued the rule in late 2013, it mostly just repeated the text of the statute, leading some outside critics to call for the law to be tightened further to force the Fed’s hand.
No specific legislation has been proposed this Congress to do that. Nevertheless, Fed Governor Jerome Powell listed it among his concerns in a speech dedicated to warning against the Fed audit and similar legislative efforts at Catholic University on Monday.
“The Congress should preserve the ability of the Fed to respond flexibly and nimbly to future emergencies,” Powell said. “Further restricting or eliminating the Fed’s emergency lending authority will not prevent future crises, but it will hinder the Fed’s ability to limit the harm from those crises for families and businesses.”
