Shelby Bill Would Give Regional Fed Presidents More Power

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U.S. Senator Richard Shelby
U.S. Senator Richard Shelby is a Republican from Alabama. Photographer: Andrew Harrer/Bloomberg

Republican Richard Shelby, chairman of the Senate Banking Committee, plans to unveil legislation Tuesday in Washington that would force the Federal Reserve Board to share some of its powers with the system’s regional presidents.

The bill would give the regional presidents a voice in setting a key interest rate, paid to banks on their excess reserves, according to a Senate staffer who has seen a draft of the measure. The legislation would also give them a role in crafting reports to Congress on monetary policy, the person said.

The Fed board, which consists of seven governors appointed by the U.S. president, currently handles those decisions. The policy-making Federal Open Market Committee includes the governors plus all 12 regional presidents, five of whom have a vote at any one time.

Other provisions would make the president of the New York Fed, which has a permanent vote on the FOMC and oversees Wall Street banks, a presidential appointment with confirmation by the Senate. It would also charge the Government Accountability Office, a non-partisan watchdog group that reports to Congress, with conducting a review of the Fed’s supervision of large banks.

“He’s casting the widest net he can in terms of policy changes, and he’s going to negotiate down from here,” said Brian Gardner, a former Republican congressional aide who is now director of Washington research for Keefe, Bruyette & Woods Inc.

Regulatory Relief

Shelby has been working for weeks to craft legislation he said would make the Fed more accountable and transparent, while also providing regulatory relief to smaller banks. The bill comes amid widespread displeasure among lawmakers, from Democratic Senator Elizabeth Warren of Massachusetts to Senator David Vitter, a Louisiana Republican, over how the Fed has regulated Wall Street and helped bail out large financial firms during the crisis of 2008.

Shelby has resisted calls to include more sweeping changes, such as one championed by Kentucky Republican Senator Rand Paul that would have subjected the Fed’s monetary policy decisions to more scrutiny by Congress.

Nor does the bill include a proposal being worked on by Warren and Vitter that would restrict the Fed’s emergency-lending powers, according to the aide, who asked not to be identified because the person wasn’t authorized to speak publicly about the measure.

Session Postponed

Shelby said Monday his bill was a “work in progress,” signaling his intention to negotiate with Democrats on his committee. Many of those Democrats signed a letter last week criticizing Shelby for so far refusing to share his proposals. After the letter was made public, Shelby postponed a committee meeting on the bill, originally set for this week, to May 21.

The bill would effect subtle shifts of power within the central bank, where the Fed board has been the center of authority since 1935.

If the measure becomes law, the full FOMC would set the central bank’s interest rate on excess reserves. That rate, separate from the benchmark federal funds rate, has taken on added importance in recent months as the Fed contemplates its first rate increase in almost a decade.

Since 2008 the FOMC has put the fed funds rate in a range from zero to 0.25 percent. As it lifts the benchmark, the Fed has said it will maintain the range, using the rate on excess reserves as a “ceiling” on its upper end.

Vacant Post

Some of the details of the bill were reported earlier in the Wall Street Journal.

Another provision could pressure the White House to fill the vacant position of vice chair for supervision. Congress created the post in the 2010 Dodd-Frank Act and required its holder to appear before lawmakers twice a year. The White House hasn’t nominated anyone for the position, frustrating some in Congress.

Under the bill, the Fed chair would be required to testify in the supervision vice chair’s place as long as the post remained vacant, according to the staffer. The Fed chair testifies to Congress twice a year on monetary policy.

The bill would also require the Fed to report to Congress every other year on its regulation and supervision of non-financial institutions, the person said. Fed officials have made a push in recent months to examine whether so-called shadow banks, including mutual funds, hedge funds and broker-dealers, engage in activities that could threaten financial stability.

The draft would create a congressional commission to examine whether the Fed required other structural changes, the aide said. The commission’s recommendations wouldn’t be binding.

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