Federal Reserve reform is in the air in Washington. Senate Banking Committee Chairman Richard Shelby proposed legislation last month that would in his view strengthen the central bank. We asked 53 economists what they thought about some of Shelby's proposals.
There's bipartisan discomfort with the New York Fed president's unique status on the Federal Open Market Committee, which sets the level of interest rates for the entire U.S. economy. The other 11 regional Fed presidents rotate as voters, while the New York Fed president has a permanent vote.
Such special power prompted Senator Jack Reed, a Rhode Island Democrat, to propose legislation last year that would make the New York Fed job appointed by the president and confirmed by the Senate, just like the seven Fed Board seats in Washington. Reed also wanted the New York Fed president to testify before oversight committees. Shelby, an Alabama Republican, adopted that idea in his proposal this year. The New York Fed chief's out-sized influence over bailouts during financial crises is another reason why the job calls for more accountability, Reed said.
Sixty-two percent of economists in the Bloomberg News survey said they did not want the New York Fed president to become a political appointee. Only 14 percent said yes. In other words, Wall Street wants their banker-of-last-resort to have private, not political, interests in mind. It's an idea that goes back to the foundation of the Federal Reserve Act.
Bloomberg also asked economists if Fed governors aside from Chair Janet Yellen and Vice Chairman Stanley Fischer give an adequate number of speeches explaining their economic outlooks and votes. These policy makers are supposed to be accountable to the public, not the chairman. But they rarely dissent, giving the impression that they vote as a block with the chair. The last dissent by a governor was a decade ago. Shelby proposed giving Fed governors their own staff to strengthen their independence.
When we asked Wall Street economists if Fed governors explain their actions sufficiently, 54 percent said yes. Only 8 percent said no, while 30 percent said what they say doesn't matter because they almost always vote with the chair. Put another way, barely half of the economists surveyed are satisfied with the accountability of governors, while almost a third said they aren't independent so their stated views are irrelevant.
The Fed also will have a new operating procedure when it starts to raise interest rates. It created so much excess cash in the banking system with its quantitative easing program (after cutting the policy rate to zero, the Fed began buying billions of dollars in government bonds) that it can't really target the federal funds rate precisely. The rate the Fed sets now will be the one it pays on the excess cash that banks park at the Fed. Because it's a key policy rate, Shelby wanted to shift that power to the FOMC. Right now, it resides solely with the Board.
Forty-one percent of economists agreed with Shelby and said that control should shift to the FOMC, while 22 percent said it should remain with the Board. Thirty-seven percent said it doesn't matter because the committee and the Board will always vote together.
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