Detractors from both major political parties are preparing legislation to rein in the powers of the Federal Reserve, moves that would test and potentially restrain its independence.
The proposals include ordering a broad audit of the central bank, including its secret policy making, and giving Congress the power to confirm or reject the president of the New York Federal Reserve Bank, one of the most influential.
“Given that the New York Fed is the one of the most powerful banking regulators in the world and supervises some of the country’s largest and most complex banks, someone at this institution needs to be directly accountable to the American people,” said Chip Unruh, a spokesman for Sen. Jack Reed of Rhode Island, a top Democrat on the Senate Banking Committee.
Reed will soon reintroduce a proposal to subject the nominee to head the New York Fed to Senate confirmation and periodic questioning by the Congress.
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Along with its role in errors that led to the 2008 financial crisis, the New York Fed came under scrutiny last year when a former employee claimed she was wrongfully dismissed after alerting higher-ups to conflict of interest at Goldman Sachs. New York Fed President Bill Dudley had been Goldman’s chief economist.
In 2012, congressional investigators suggested the New York Fed knew large global banks were manipulating interest rates in Europe and Great Britain.
The Fed’s Board of Governors in November began a review on how large banks are supervised, and complaints have driven plans pushed by Republicans and Democrats for a complete audit of Fed operations.
The Federal Reserve already is subject to some auditing by the Government Accountability Office under the revamp of financial regulation in 2010 known as the Dodd-Frank Act. The Fed has an independent outside auditor looking at its books, too.
But Fed deliberations over monetary policy, some of its lending to foreign entities as well as its discussions with foreign central bankers are generally off limits to auditors. The Fed views any audit of its decision making as political interference.
“Back in 1978, Congress explicitly passed legislation to ensure that there would be no GAO audits of monetary policy decision-making, namely policy audits,” Fed Chair Janet Yellen said in December.
“I’m very open to looking for ways ourselves to improve our communications and transparency, and working with Congress to do that,” she said. “But I would be very concerned about (legislative) actions.”
Since 1913, the Fed has used closed-door deliberations to conduct monetary policy, raising its benchmark interest rates when the economy gets too hot and inflation is a threat, and cutting them in a bid to spark activity when economic recovery loses steam. It has done so irrespective of whether a Democrat or Republican is in the White House, often to the ire of a sitting president.