A coming crackdown on Federal Reserve power?
Critics want to water down the power of the New York Fed president.
A move to shift power away from the New York Federal Reserve Bank is finding some powerful friends in Congress amid lingering worries that a key part of the central bank is too cozy with Wall Street.
Two Republicans running the banking committees have both said they plan to explore proposals from the outspoken, former Dallas Federal Reserve Bank President Richard Fisher that would roll back a long-standing provision that gives the president of the New York Federal Reserve Bank an automatic position as vice chairman of a powerful committee and weaken New York’s oversight of Wall Street banks.
The move also reflects some regional rivalries within the Fed — the New York Federal Reserve Bank often overshadows other regional banks, and Fisher, known as a rabble rouser in Federal Reserve politics, has been lobbying for a change to the power structure.
Banking Chairman Richard Shelby (R-Ala.) and House Financial Services Jeb Hensarling (R-Texas) say they’re open to reducing the power of the New York Fed, and the move has the potential to appeal to Democrats who have been critical of the Fed, like Sen. Elizabeth Warren (D-Mass).
“Mr. Fisher’s proposal dealing with the Fed and the Federal Open Market Committee — we’re going to pursue all that and that would include the role of the New York Fed,” Shelby said last week.
And some Democrats have also said they’re open to policies that shift power away from the New York Fed.
“The New York Fed plays an extraordinary role, and maybe it’s extraordinarily captured, but it also represents only 6 percent of the population,” said Rep. Brad Sherman, (D-Calif.) who wants to give a permanent vote on monetary policy decisions to the San Francisco Fed, which serves nine western states and 20 percent of the population.
Sen. Mark Warner (D-Va.), a moderate who said he hasn’t taken a position on the proposals yet, said, “I do think there’s been some legitimate questions of the role of the New York Fed.”
Fisher, who retired Thursday after 10 years at the Dallas Fed, wants to yank the New York Fed’s permanent position as vice chair of the all-powerful Federal Open Market Committee, the panel charged with making monetary policy decisions, which met Wednesday.
While the New York Fed president could still participate in monetary policy discussions, he or she would no longer always get a vote. Fisher suggested the job should rotate among the regional Federal Reserve Banks every two years.
The move would upend the current structure, as the New York Fed has had a lock on that spot since 1936, thanks largely to its role as the infrastructure, which supplies the trading desk that carries out the Fed’s monetary policy decisions.
Fisher is also proposing that other regional Fed banks oversee some of the Wall Street giants in a move aimed at addressing criticism the New York Fed missed warning signs of the financial crisis, is too soft on Wall Street and holds too much power and influence at the Fed.
“The greatest concern appears to be the problem of regulatory capture by the largest and most powerful institutions,” Fisher said in a February speech in New York laying out his plan.
Wall Street critics have been suspicious of the New York Fed since it and its then leader, Timothy Geithner, played a key role in responding to the 2008 financial crisis and the bailouts that entailed.
Late last year its current president, William Dudley, was hauled before the Senate Banking Committee after reports from ProPublica and NPR’s This American Life that focused on a New York Fed examiner who said her warnings about certain business practices and deals at Goldman Sachs were ignored or brushed aside by her superiors. She provided recordings of her dealings with Fed officials to back up her case.
“We’ve got on tape higher-ups at the New York Fed calling off the regulators,” Warren told Dudley at the November hearing. “And I’m just asking the same kind of question — is there a cultural problem at the New York Fed? I think the evidence suggests that there is.”
“I’m going to take a very serious look at that proposal,” said Hensarling. Hensarling said his panel will soon be working on another package of changes to reshape the Federal Reserve and “ensure we have a predictable rules-based monetary policy that works for working Americans. But anything that Richard Fisher proposes is going to get a very serious review from our committee.”
Similarly, Shelby told reporters last week he plans to pursue the proposal.
“This is 2015 and things have changed,” said Shelby, who is quietly working on a Senate legislative package. “We have a shift in population. Everything used to be in New York and a lot of it’s not.”
Part of the idea’s popularity may also be that it’s coming from Fisher, who is a strange political animal.
He ran for U.S. Senate as a conservative Democrat back in 1993 — which he now calls his “midlife crisis” moment, losing to former Sen. Kay Bailey Hutchison (R-Texas). He worked in the Carter and Clinton Administrations and later worked for Henry Kissinger’s consulting firm, before joining the Dallas Fed. He also spent much of the 1990s running his own investment firm.
Some Republicans like Fisher, because he often bucked the majority on the Fed, opposing the continued expansion of economic stimulus measures, which he called “monetary Ritalin” for the markets. Fisher is considered a “hawk,” a monetary conservative who worries most about inflation, which jives with the thinking of Republicans and their policies.
“I have the highest regard for Richard Fisher, he’ll certainly be missed, his voice on monetary policy,” said Hensarling, who represents part of Dallas, although not Fisher.
Fisher is also known for being one of the louder voices calling for regulators to chop up the giant megabanks into smaller banks. And two years ago, he took an unprecedented step for a Fed president of attending the an annual gathering of conservatives, Conservative Political Action Conference, to make the case for breaking up Wall Street giants.
The big question now is whether his proposals can make it into legislative text.
While Shelby likes the idea, other senators on his committee, including Republican Bob Corker and Democrats Jack Reed and Heidi Heitkamp said they’re not ready to weigh in. For his part, Reed has a different bill to require the president of the New York Fed to be presidentially appointed and confirmed by Congress rather than selected by its board.
However, the ranking Democrat on the panel, Sen. Sherrod Brown, is cool to the proposal and said he doesn’t think Fisher’s proposal “changes much.” And Sen. Bob. Menendez (D-N.J.) said he has concerns about shifting power away from the New York Fed.
“I think the New York Fed plays an important role in the Fed system. And I don’t take lightly to some of the changes being discussed,” Menendez said. “Some of what I’ve seen is too far reaching.”
When POLITICO asked about the proposal in a press conference recently, Federal Reserve Chair Janet Yellen said she thinks the current system “works well,” and that there were good reasons for the current structure giving New York a permanent spot on the FOMC. But she added it was up to Congress.
The Dallas Federal Reserve said Fisher was unavailable to comment in his last week on the job, but a spokesman confirmed Fisher has been fielding questions from lawmakers on the hill on his proposal.
And Fisher is reportedly thrilled that there’s interest in this idea, said Camden Fine, president and CEO of the Independent Community Bankers of America, which is also pushing for Fisher’s proposal. Fine said he spoke with Fisher just last week about the idea, which “would balance the Federal Reserve,” and reflect that “economic centers are no longer concentrated on Manhattan island,” Fine said.
Fisher also assured Fine that his retirement from the Dallas Fed won’t dampen his enthusiastic voice for pushing his proposals. “He’s not going anywhere,” Fine said.
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