In a sign of growing tensions between the Federal Reserve and Congress, Fed Chair Janet L. Yellen spent Tuesday on a congressional hot seat, fending off criticism from the left and right and a spate of ideas that would encroach on the central bank’s independence.
The main topic during her appearance before the Senate Banking Committee was interest rates, and how soon the Federal Open Market Committee might act to raise them to prevent a clearly recovering economy from overheating.
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“There has been important progress,” Yellen told the senators, signaling that there may not be any action on interest rates until later this spring at the earliest. “However, despite this improvement, too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective.”
While the discussion of interest rates was largely technical and bland, sparks flew when the subject turned to renewed efforts on Capitol Hill to curtail or penetrate the veil of the Fed’s operations.
Republican Committee Chair Richard Shelby of Alabama greeted Yellen with at least five ideas for overhauling the Fed – from new ways of monitoring inflation and explicit rules for guiding monetary policy to rotating the vice chairmanship of the Fed, which now permanently belongs to whomever is serving as president of the Federal Reserve Bank of New York and consolidating the Fed’s 12 regional districts into five, according to The Hill.
Related: Rand Paul Reintroduces ‘Audit the Fed’ Bill
In each case, Yellen said thanks, but no thanks. “I don’t think it would make a lot of sense,” she said of the inflation monitoring idea, in light of how inflation remains well below longer-term objectives.
Meanwhile, Sen. Elizabeth Warren (D-MA), a champion of the left, pressed Yellen on whether members of her staff — particularly General Counsel Scott Alvarez — are genuinely committed to implementing tough rules for the financial sector.
Warren cited some comments from Alvarez that were critical of some provisions of the 2010 Dodd-Frank financial reform law and pressed Yellen to rein in her staff.
“The Fed’s general counsel or anyone at the Fed’s staff should not be picking and choosing which rules to enforce based on their personal views,” Warren said. “I urge you to carefully review this issue and to assess whether the leadership of the Fed’s staff is on the same page as the Federal Reserve Board.”
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Yellen replied that the board wasn’t seeking changes to Dodd-Frank. And in a statement after the hearing, Yellen defended the Fed’s top lawyer, according to the Wall Street Journal.
“My colleagues and I depend, with confidence, on Scott Alvarez’s expert advice and counsel,” Yellen said. “He is a dedicated public servant who is committed to thoughtful public policy.”
In the face of these and other broadsides, the diminutive but steely Yellen reminded lawmakers of the importance of minimizing political interference in the Fed’s monetary policy making.
“Central bank independence in conducting monetary policy is considered a best practice for central banks around the world,” she said. “Academic studies, I think, establish beyond the shadow of a doubt that independent central banks perform better.”
For sure, the Fed and Congress have had their differences over the years.
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Yellen’s predecessor, Ben Bernanke, faced similar suspicion and distrust from lawmakers five years ago in the wake of trillion-dollar efforts to bail out the crisis-ridden financial system. Bernanke had to mount an aggressive campaign to stave off congressional intrusion during debates over the Dodd-Frank financial overhaul legislation.
The Fed ultimately emerged from that era with broad regulatory powers and implemented a massive stimulus after the 2007-2009 financial crisis, expanding its balance sheet to $4.5 trillion, which Yellen has inherited.
As Bloomberg reported this week, lawmakers from both parties are now demanding greater “transparency and accountability” from an institution that has the power to impose capital requirements for banks and influence how much Americans pay for a mortgage or an auto loan.
“Ultimately, accountability trumps independence when lawmakers are particularly eager to blame the Fed for a crisis,” Sarah Binder, a professor of political science at George Washington University, wrote yesterday in an op-ed in The Washington Post. “With disagreements rising about the timing and pace of rate increases and about the size of the Fed’s balance sheet, Yellen and the Fed will continue to face calls for greater responsiveness to Congress.”
Related: Exclusive: Local Bankers Emerge as Fed Ally in Fight Against Audit Bill
Arguably the biggest challenge to the Fed’s structure is the growing movement to “audit” the Fed through legislation sponsored by Sen. Rand Paul (R-KY), a potential 2016 presidential candidate, that would subject the central bank's monetary policy decisions to external review. Paul’s father, former Rep. Ron Paul (R-TX) pushed a similar bill while he was still in Congress – an idea that Bernanke successfully fought off.
Yellen argued the audit measure – recently reintroduced by Paul -- would allow politicians to second-guess the Fed’s decisions, which, in turn, would weaken the central bank. And the ultimate victim of that process, she said, would be the U.S. economy.
The Fed chairwoman tried to reinforce her point by holding up a thick report before lawmakers as a way to highlight that most of the Fed's operations are already subject to outside audit.
“I want to be completely clear,” Yellen said yesterday. “I strongly oppose Audit the Fed.”
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