|
 Such voices from the 2016 presidential campaign have emboldened
lawmakers who seek to limit the Fed's powers and are prompting some
current and former Fed officials to call for steps to placate the
U.S. central bank's harshest critics.
More than a dozen insiders and Fed watchers said in interviews they
were concerned that the next president could be more sympathetic to
critics' views that the Fed has grown too powerful and impenetrable.
Confronted with a possible Republican push to give Congress more say
in shaping Fed policy, these insiders say concessions may be
necessary to protect the Fed's independence.
"There's a deep-seated institutional fear that if you crack the door
open, it will be kicked in. But often that's just not the case,"
said David Stockton, the Fed's former research director and now a
fellow at the Peterson Institute for International Economics.
The concerns among the group, which includes current and former
regional presidents, are growing despite the expectation that
Democratic front-runner Hillary Clinton, who polls suggest should
win in November, would help the Fed preserve the status-quo.
 The worries reflect the balancing act that central banks face as the
world economy still sputters despite aggressive monetary easing.
Central bankers are getting blamed both for overstepping their
bounds and for not doing enough to bolster growth. Even as the U.S.
economy outperforms, the Fed is especially vulnerable, because it is
ahead of its peers in unwinding the crisis-era stimulus.
Chair Janet Yellen and her colleagues have warned in public speeches
and private meetings with lawmakers that initiatives to make the Fed
more accountable and transparent could backfire. They are defending
the decades-old, but now challenged, consensus that the Fed can best
safeguard long-term economic stability when shielded from direct
political interference.
The officials who were interviewed said the Fed could take steps to
become more open, such as responding more promptly to lawmaker
requests for information and revealing what rules of thumb inform
decisions on rates.
"The best response is not to go into a defensive shell, but instead
the Fed should attempt to influence the terms of any changes that
are coming," said Stockton.
Some are even embracing a limited outside review of Fed decisions -
effectively a version of an "audit" supported by Trump, Sanders and
Cruz.
While proposals for the Fed to become more open in explaining what
informs its decisions may get some traction, those interviewed
acknowledge that the Fed leadership appears unlikely to embrace an
audit or major changes to its policy playbook.
The Fed declined to comment on changes suggested in the interviews.
FED ON AUTOPILOT?
Two separate bills proposed by the Republicans in the Senate and the
House call for a government watchdog to evaluate, or "audit," policy
decisions and to tie them to single policy rule that the Fed would
adopt and make public.
Yellen and her colleagues say the "audit" would expose the Fed to
short-term political pressures, making policy less, not more
predictable. The single rule policy would "severely impair" the
Fed's policymaking, Yellen has warned, while New York Fed President
William Dudley has compared it to going "on autopilot" in the face
of complex global challenges.
 Concern about the Republican initiatives is particularly strong
among the 12 district presidents.
Freshman Minneapolis Fed President Neel Kashkari told Reuters in a
February interview that the Fed's credibility suffered during the
recent economic crisis.
The central bank needs to abandon its "Wizard of Oz routine" where
it tells Americans "we are so mysterious, so smart, you can't
understand what we are doing," he said.
Narayana Kocherlakota, his predecessor, told Reuters that while he
did not think Fed policy lacked public oversight, the central bank
should address such concerns and offer its own solutions.
"Optics matter," he said. "Simply to continue to say that 'we're
really transparent and there is no reason for us to change how we're
doing things' - I don't think that's going to work."
[to top of second column] |
Shortcomings of the current approach of reiterating the Fed's
criticism of the proposed changes were in plain view at Yellen's
latest congressional testimony on Feb. 10.
In its run-up, Yellen held 10 private discussions with lawmakers in
January alone, including a call with Republican Representative Jeb
Hensarling, who chairs the House Financial Services Committee and
backs the rule-based policy bill.
That however did not stop Hensarling from putting Yellen on the
spot, presenting a letter from prominent economists, including three
Nobel Laureates and several former Fed officials who backed his
bill, and labeling Yellen's warnings as "apocalyptic" and
"hyperbolic."
Yellen was also taken to task by some Democrats over the Fed's
planned rate hikes that they said would disproportionately hurt
minorities, and over what they saw as too cozy ties with Wall
Street.
Kocherlakota, now a professor at University of Rochester, said a
scheduled audit, preferably once every two years, was a "very
manageable" way to deal with the criticism and avoid ad-hoc
political meddling.
In a similar vein, Andrew Levin, a former advisor to Yellen,
suggested the Fed could meet halfway the supporters of rule-based
policy by disclosing benchmarks it uses in its debates.
"It's really hard to understand why the Fed won't use these
benchmarks to help explain what they're doing," said Levin, now a
Dartmouth College professor, citing as an example the Taylor Rule in
which rates are tied to levels of inflation and growth.
CENTURY OF TENSIONS
By sharing information more readily, the Fed could also possibly
improve relations with Republicans, some current and former Fed
officials said.
That relationship has been strained by a drawn-out probe into an
alleged 2012 leak of sensitive policy details to advisory firm
Medley Global Advisors. Republican lawmakers have requested
transcripts and other information related to the case, but the Fed
has said it is limited in how much it could disclose because of an
ongoing Justice Department investigation.
Others say the central bank should be open to review its regional
structure dating back to 1913, and how regional presidents are
selected. Today they get picked by district Fed directors appointed
by local bank groups and the Fed governors in Washington, with
little public disclosure.
The Fed and the Congress have a long history of friction. A
Brookings Institution paper published last week analyzed 879 bills
proposed since 1947 and found politicians usually try to redefine
the Fed's powers when the economy falters, noting a spike in such
efforts since the 2008 global financial crisis.
The latest major changes came in 1977 when lawmakers clarified the
Fed's dual price stability and employment mandate and in 2010, when
the Dodd-Frank act gave the Fed greater supervisory powers while
setting limits on future emergency lending and its autonomy to
conduct it.
"The approaching November elections compound uncertainty for the
Fed," Sarah Binder and Mark Spindel wrote in the paper. "We doubt
the path forward will be easy for even the best intentioned and
expert of central bankers."
(Reporting by Jonathan Spicer; Additional reporting by Alana Wise in
Washington; Editing by Tomasz Janowski)
[© 2016 Thomson Reuters. All rights
reserved.]
Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
