Donald Trump says the Federal Reserve has stoked asset bubbles and backs a congressional review of its decisions. Bernie Sanders also wants to “audit” the Fed to make it less beholden to Wall Street. Ted Cruz calls for a return to a gold standard abandoned in 1933.
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.”
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.”