Representative Kevin Brady, the top Republican on the Joint Economic Committee, is drafting legislation that would focus the Federal Reserve on a single mandate for price stability, require more transparency and shift control over interest rates away from Washington.
“This financial crisis really has raised a legitimate question: What is the role of the Fed?” the Texas Republican said in an interview last week. The debate is happening “not just among lawmakers but among the public as well.”
Brady and his staff have had preliminary discussions with other congressional Republicans, and a few weeks ago discussed the proposal over dinner with William C. Dudley, president of the New York Fed. Brady said Dudley argued in favor of the so- called dual mandate, in which Congress requires the Fed to focus on both full employment and low inflation.
The broader scope “does give them an expanded role and opportunity to inject themselves in a number of areas,” Brady said. New York Fed spokesman Jack Gutt declined to comment.
Brady intends to introduce the legislation in January or early February with the aim that it would be co-sponsored by Spencer Bachus, the Alabama Republican who chairs the House Financial Services Committee, which has oversight authority over the Fed, according to a Republican staff person on the Joint Economic Committee.
“We haven’t seen the proposal yet, but will certainly give it attention when the bill is referred to the Financial Services Committee,” said Jeff Emerson, a spokesman for the House committee’s Republicans.
From there, the fate of the legislation probably depends on whether it is endorsed by the eventual Republican presidential nominee and the makeup of the House and Senate after the 2012 elections.
The Fed has been a hot topic of discussion during Republican presidential candidate debates. Republicans in both the House and Senate sense the Fed strayed outside of its mission with rescues for firms such as American International Group Inc., said Andrew Laperriere, managing director at International Strategy & Investment Group Inc. in Washington.
Any bill that constrains the Fed “is going to have pretty broad-based support among Republicans,” said Laperriere. Still, moving from criticism to legislation, especially on a single mandate at a time of high unemployment, could be a reach for some Republican presidential candidates, he said. That makes the legislation more viable in 2013, once the election is over, he said.
Democrats are likely to oppose any effort to switch the Fed to a single mandate especially when the unemployment rate has been above 8 percent for almost three years, said Sarah Binder, senior fellow in governance studies at the Brookings Institution in Washington. Unemployment fell to 8.6 percent in November from 9 percent in October. Until last month, the rate had been at 9 percent or above since April.
Reining in the Fed “still rings true to rank and file Republicans” in both the House and Senate who sense “the Fed has taken far too active a role and crossed boundaries into fiscal policy,” Binder said. “A single mandate for price stability is a non-starter for Democrats,” she said.
Federal Reserve Chairman Ben S. Bernanke told the Joint Economic Committee in October that the Fed’s dual mandate “is workable, although I do agree that in the long run the only thing the Fed can control is inflation.”
Binder said both parties could probably find common ground on points within Brady’s legislation that requires faster disclosure.
A draft of the bill, obtained by Bloomberg News, calls for release of Fed meeting transcripts within two to three years. Transcripts are now shown to the public with a five-year lag.
Release of meeting minutes, including staff forecasts, would have to be released in 15 days. Minutes are now disclosed with a three week lag, and the Fed keeps staff forecasts prepared for the policy meetings secret.
Brady also takes aim at the Banking Act of 1935 which consolidated the voting power on the Fed’s 12-member Open Market Committee with the politically-appointed Board of Governors.
The seven seats on the Washington-based Board are appointed by the president and confirmed by the U.S. Senate, and have a permanent vote on monetary policy, as does the president of the New York Federal Reserve. The other 11 regional presidents rotate for the four remaining policy seats, with the Cleveland and Chicago Fed presidents voting every other year and the remaining nine presidents voting every third year.
The legislation would give all 12 regional Fed banks membership on the FOMC which sets monetary policy.
“My thinking is the original intent of the Fed was to have representation from all industries, from agriculture to Main Street, and throughout it’s really become a New York-Washington- centric committee,” Brady said.
The regional Fed presidents are a diverse group with some strongly focused on the Fed’s employment goal now so the proposal could hold appeal to some Democrats.
The proposal would constrain the Fed in other ways. Brady’s draft legislation calls on the Fed to describe a lender-of-last- resort policy and “make clear that credit in any form will not be provided to insolvent banks or other financial institutions.”
The bill would move exchange rate policy to the Fed from Treasury, and restrict the central bank’s normal open market operations to Treasury securities only. The Fed’s balance sheet currently holds $858 billion in agency mortgage backed securities aimed at improving conditions in housing finance.
“I don’t think the Fed ought to be in the role of allocating capital in this country,” said Brady. “Future purchases would be limited to Treasuries.”
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