Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Fed Bashing Becomes the One Issue Both Parties Agree On

Senate Committee on Banking Housing and Urban Affairs hearing during which Federal Reserve Board Chairman Ben Bernanke delivers second semi-annual report on monetary policy.

The Federal Reserve is under fire from both the left and the right on Capitol Hill.

In a rare display of bipartisanship, both Republicans and Democrats appear to believe that the Fed needs reforming. But while they agree there is a problem, they disagree on what exactly the problem is.

The Fed bashing cames as the central bank's policymakers, who will end a two-day meeting later Wednesday, are widely expected to announce further steps to stimulate the sluggish US economy.

Republicans worry that monetary policy is too biased toward easing. Some Democrats, led by Congressman Barney Frank (D-MA), think the Fed is influenced by private bankers toward a policy that is too tight.

The Republican leadership in the House and Senate sent a letter to Fed chairman Ben Bernanke Tuesday urging that the Fed "resist further extraordinary intervention in the U.S. economy."

The letter argued that the most recent round of quantitative easing had "likely led to more fluctuations and uncertainty in our already weak economy."

Last week, Frank authored a white paper arguing for a restructuring of the Fed to take away authority from the regional Fed bank presidents.

The paper is widely viewed as a reaction to the recent dissents registered by three regional bank presidents to recent Fed policies aimed at further easing.

The Federal Open Markets Committee , which sets monetary policy, is comprised of 12 voting members. Seven of these are Fed governors appointed by the President of the United States. One is the President of the New York Fed. The other four votes rotate between the other 11 regional bank presidents.

The regional bank presidents are appointed by the regional bank boards, which are dominated by banking and corporate interests. Frank claims that this gives business interests too much of a voice in monetary policy, and that the result is a policy that is too "tight"  despite slumping economic conditions. The regional banks are named for the city where they are located, which is why you hear about the "Philly Fed" or the "San Francisco Fed."

Barney Frank: Jobs & Deficit

Frank's proposal would strip voting power from the regional bank presidents. Opponents of the move argue that it would "politicize" monetary policy by eliminating the influence of non-political voices on the FOMC.

The Republican and Democratic criticism of the Fed lean in opposite directions. The Republicans would likely be able to influence policy away from easing by restructuring the Fed in exactly the opposite direction: by giving the regional presidents more votes on the FOMC.

For its part, the Fed is likely to resist any changes that might impinge on its independence. Bernanke has not replied to either Frank's proposal or the Republican letter.

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