The Federal Reserve has long prided itself on its independence from Congress and the White House in setting monetary policy, so it must have come as a shock when the Republican-controlled House voted at the last minute last week to dip into the Fed’s reserve capital surplus account for $16.3 billion to help fund a $325 billion multi-year highway and transportation bill.
Former Fed Chairman Ben Bernanke, an unflinching champion of the Fed’s independence who had to fend off past incursions by Republican and libertarian lawmakers, denounced the maneuver as “budgetary sleight of hand” that sets a bad precedent.
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“The idea of using Fed capital to pay for government spending, which comes up periodically, is a bad one,” Bernanke wrote in a blog post for the Brookings Institution this week. “Although the Federal Reserve is not a private bank and can in fact operate with little or no capital, it’s not good optics or good precedent for Congress to be seen as raiding the supposedly independent central bank to pay for spending.”
Alice M. Rivlin, a former vice chair of the fed who is now at the Brookings Institution, has battled her share of budgetary shenanigans over the years – she served as director of the Office of Management under Bill Clinton, and was the founding director of the Congressional Budget Office.
“Using the Fed’s capital as a pay-for is a new low in budgetary gimmickry,” she said in an interview Tuesday. There were other signs of mounting tension between Congress and the Fed -- now being led by Bernanke’s successor, Janet Yellen.
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Within a day of assuming the reins of the powerful House Ways and Means Committee last week, Rep. Kevin Brady (R-TX) told Roll Call he intends to press ahead with his proposal to create a bipartisan commission to study the Fed’s monetary policy and make recommendations for fundamental change.
Brady, a former chair of the Joint Economic Committee and harsh critic of the Fed’s soft-money policies, has long sought creation of a Centennial Monetary Commission that would evaluate “alternative monetary regimes” and “recommend a course for monetary policy going forward.”
Brady said he would also try to pass another proposal that would dramatically shrink the Fed’s legislated responsibility. Currently, the Fed is obligated to pursue a dual mandate aimed at both controlling inflation and moving the economy towards full employment. The conservative free-market Texas Republican is advocating a change that would give the central bank the single mandate to contain inflation.
“At best, the Federal Reserve may temporarily increase the level of employment through monetary policy, but such efforts risk the possibility of price inflation and increased business cycle volatility in the future,” Brady and other co-sponsors said in introducing the “Sound Dollar Act of 2015” earlier this year.
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Last week, House Financial Services Committee Chair Jeb Hensarling, another Texas Republican, lectured Yellen during a hearing on the Fed’s supervision and regulation of the financial system. Hensarling complained that the Fed had been granted “vast, new sweeping regulatory powers” by the 2010 Dodd-Frank financial regulation overhaul despite its contribution to the last financial crisis.
“The Fed must not be allowed to shield its vast regulatory activities from the American people and congressional oversight by improperly cloaking them behind its traditional monetary policy independence,” Hensarling said.
For sure, it’s not just the Republicans clashing with the Fed. Last September, Sens. Elizabeth Warren (D-MA.) and Sherrod Brown (D-OH) called for Congress to investigate the New York Federal Reserve Bank following the release of secret recordings showing how the central bank allegedly was going easy on firms it was responsible for regulating. Then in February, Warren complained to Yellen during a hearing that the Fed’s general counsel, Scott Alvarez, had gone too far afield of Fed policy by publicly advocating for major changes to the Dodd-Frank law.
For decades, the Fed has been a frequent target for Republican and Democratic lawmakers, especially in times of economic turmoil and crisis. Bernanke helped the Obama administration steer the economy away from a cliff at the height of the financial crisis, but subsequently came under attack on Capitol Hill for exercising too much power and autonomy.
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Indeed, former Rep. Ron Paul (R-TX) – a fiery libertarian and father of Sen. Rand Paul of Kentucky, proposed abolishing the Fed altogether. He persuaded nearly two-thirds of the House to co-sponsor a measure requiring detailed congressional audits of the Fed that he claimed would prove that “it’s the Fed that has caused all the mischief” in the economy, The New York Times reported in 2009. Rand Paul subsequently picked up his father’s idea for a tough Fed audit.
While those low-interest, “easy-money” policies initiated by Bernanke and carried on by Yellen have generally drawn strong support from populists and liberal Democrats, Republicans like Brady have complained that the Fed has mistakenly focused too much attention on job creation and not enough on the potential for a return to an inflationary economy.
Rivlin, the former Fed vice chair, said that in some ways it’s difficult to know just how much to worry about Congressional threats to the Fed’s independence.
“I don’t know how seriously to take this,” she said, pointing out that both parties have a long history of railing at the Fed when it suits them politically.
“Some of these problems with the Fed seem to me to arise from the perception that they’ve kept interest rates too low for too long, which is sort of the opposite of the populist hostility you used to find to high interest rates.
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“Traditionally there has been an element of the Democratic party that thought the Fed was in cahoots with bankers for keeping interest rates too high. Now we have this interesting switch.”
The last time she was called to testify on Capitol Hill, she said, she faced Republican criticism that the Fed was “being very mysterious and not transparent.”
“I don’t think that’s true at all – I think that’s code for ‘We think interest rates are too low.’ And that translates into ‘The Fed is emphasizing employment too much and not worrying about inflation.’”
“On the other hand,” she added, “there is no inflation.”
Rivlin said that she expects the sound and fury on Capitol Hill will result in little significant change in how the central bank operates.
“It’s unpleasant to be under attack but I don’t think it affects the deliberations on monetary policy,” she said, “Though, if it were to result in some kind of real interference with the independence of the Fed in making monetary policy it would be quite serious.
“But I’ve always believed it’s mostly bluster. Congress doesn’t want to make monetary policy. It’s too hard. It’s also controversial and they would be drawing all that controversy to themselves.”
