Garrett Mention - CQ: Federal Reserve Official Seeks to Reassure Lawmakers
Washington,
Jul 10 -
A top Federal Reserve official Thursday sought to reassure lawmakers that the central bank can handle new responsibilities to guard against systemic risks to the economy, even as some House members continued to raise questions about the plan.
As part of a broader overhaul of financial industry regulations, the Obama administration wants to install the Fed as a regulator to watch for large, widespread threats to the economy. But some lawmakers, many of them Republicans, have serious concerns that expanding the Fed’s role could compromise its responsibility to guard against inflation.
“Republicans believe that the Fed’s core mission — the conduct of monetary policy — may be seriously undermined if it’s supervisory responsibilities are dramatically expanded,” said Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee.
Fed Vice Chairman Donald L. Kohn did his best to tamp down those concerns during a hearing before the panel’s Subcommittee on Domestic Monetary Policy and Technology.
“I just don’t see important instances in which there would be conflicts” between systemic risk regulation and keeping inflation in check, Kohn said.
“In my view there really is a congruence between the stability of the financial system and monetary policy,” he added. “We can achieve our objectives of maximum employment and stable prices much more readily in a stable financial system.”
New Jersey Democrat John Adler asked what kinds of political interference the Fed would face if it took on the new role.
“I don’t see additional political interference with the objectives you gave us,” Kohn said. “We will be accountable to the Government Accountability Office, we will be accountable to the Congress, we will be working with the other regulators and we have been successfully doing that for years.”
In recent weeks, the Fed has come under increased scrutiny on Capitol Hill, where many members, particularly Republicans, remain wary of the central bank’s role in shoring up the financial system.
Kohn said the Fed would be able to handle the new responsibilities because the universe of new firms that would fall under the central bank’s jurisdiction would not grow that significantly. “At this point that would be very, very few institutions,” Kohn said.
Texas Democrat Al Green noted that some lawmakers have concerns that concentrating even more power at the Fed could be a dangerous precedent.
Kohn said the new authorities would be “incremental” and insisted that the Fed was accountable to outside authorities.
The GAO can audit certain parts of the Fed’s activity, but is barred from looking into monetary policy decisions and operations at the discount window — which provides short-term loans — among other carve outs.
“We have been able to be held accountable without sacrificing the independence that we need to exercise monetary policy,” Kohn said.
New Jersey Republican Scott Garrett questioned Kohn about the Fed’s broad powers to lend in times of crisis.
In 1932, Congress gave the Fed the power to serve as a backstop if the federal government were to find itself facing a financial crisis. The law permits the central bank to open up its lending window “in unusual and exigent circumstances” to any entity it deems deserving, financial or otherwise, including individuals.
Garrett asked whether Kohn would agree that power should be “reined in to limit the ability to actually pick a particular institution and proverbially bail them out.”
Kohn said he would favor the establishment of a wind-down authority within the government to deal with large failed institutions. House Financial Services Chairman Barney Frank has said creating such a government mechanism is a priority.
But when Garrett asked Kohn if he would support limiting the Fed’s powers to lend in times of crisis and stabilize individual firms, Kohn said “I’d have to see the exact wording – certainly the idea I agree with.”
By Benton Ives, CQ Staff
Link to the article: http://www.cq.com/document/display.do?dockey=/cqonline/prod/data/docs/html/news/111/news111-000003162247.html@allnews&metapub=CQ-NEWS&searchIndex=0&seqNum=1
