By Mark Felsenthal and Kevin Drawbaugh
WASHINGTON, Nov 25 (Reuters) - Irate lawmakers are on track to pare back the Federal Reserve's regulatory duties and emergency powers, but it looks unlikely that Fed interest rate decisions will be exposed to second-guessing by politicians.
A proposal to subject Fed monetary policymaking to audits by a congressional watchdog won surprise approval on Nov. 19 in the House of Representatives Financial Services Committee and is heading for a vote in the full House next month.
The amendment by Republican Representative Ron Paul and Democratic Representative Alan Grayson had earned support from more than half the members of the House. A similar measure in the Senate has 30 backers.
Lawmakers are likely to use the Fed audit proposal to vent frustration at the Fed's secrecy, its regulatory track record, and some of its actions during the crisis, but will eventually focus on regulatory reforms, analysts said.
'I don't think the Congress wants to run monetary policy,' said former Fed Vice Chairwoman Alice Rivlin. 'Now, there's a clear difference of opinion about how much prudential bank regulation the Fed should do.'
MAY BE REVISITED
Paul's advocacy of abolishing the Fed predates the crisis and he has said he will not vote for the evolving financial reform bill, even if it contains his provision, because it does not go far enough.
Opponents of his proposal may try to kill or weaken it by amending a wider bill to which it was attached when the full House considers the measure.
'That one may be revisited when we get to the (House) floor,' Representative Barney Frank, the chairman of the Financial Services Committee, said after the panel's vote.
Fed officials warn that the proposal could lead markets to expect increased political pressure on the central bank to hold unemployment low at the expense of keeping the lid on inflation. In turn, that could cause longer-term interest rates to rise and harm the economy, they say.
They also worry that naming borrowers from the Fed's lender-of-last-resort discount window -- as the proposal would allow -- would stigmatize the borrowers as weak and possibly prompt bank runs, defeating the purpose of emergency lending.
The central bank has been criticized in the past for being opaque and it has responded in recent years by publishing economic forecasts more frequently and issuing minutes of its meetings with a shorter lag. It already reports to Congress twice a year on monetary policy.
Still, Paul has tapped into a powerful upwelling in popular anger at the central bank. The Paul-Grayson proposal, which was approved 43-26 in Frank's committee, supplanted a compromise amendment Frank had engineered with senior committee Democrats but which never came to a vote.
'The Federal Reserve has conducted secret bailouts that range in the hundreds of billions of dollars ... This cannot go on any longer,' Grayson said in a statement after the vote.
Fed officials believe lawmakers do not understand how much the Fed is already audited by Congress or how much of a negative impact monetary policy audits would have, and they are likely to continue to lobby strongly against the proposal.
'What the Fed wants to avoid is having the current public anger institutionalized,' said Lou Crandall, chief economist for Wrightson ICAP in Jersey City, New Jersey.
CONSUMER PROTECTION AGENCY
Even if the measure passes in the House, it is not part of a competing proposal by Senate Banking Committee Chairman Chris Dodd. Assuming both chambers eventually approve financial reform legislation, a compromise between their differing bills would need to be hammered out, offering another opportunity to kill Paul's provision.
Dodd's bill, however, also takes aim at the central bank. It would strip the Fed of its regulatory authority in favor of a consolidated financial oversight agency.
Dodd and the panel's top Republican, Senator Richard Shelby, have said this would allow the Fed to concentrate on its central mission of monetary policy.
Fed officials, however, have argued they need the insight they gain through supervision to better safeguard the economy.
'Where you have monetary policy only at central banks ... what you find is whenever there's a financial crisis or bank run, the central bank comes to the table rather late in the game,' said former Fed Governor Susan Phillips, dean of the George Washington University School of Business.
'Every central bank that's been through a financial crisis wants to get involved in regulation.'
(Editing by Kenneth Barry)
((For more on regulatory reform proposals that would impact the Fed, please click on))
((For more stories on Fed policy, please double click on )) Keywords: USA FED/CONGRESS (kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
WASHINGTON, Nov 25 (Reuters) - Irate lawmakers are on track to pare back the Federal Reserve's regulatory duties and emergency powers, but it looks unlikely that Fed interest rate decisions will be exposed to second-guessing by politicians.
A proposal to subject Fed monetary policymaking to audits by a congressional watchdog won surprise approval on Nov. 19 in the House of Representatives Financial Services Committee and is heading for a vote in the full House next month.
The amendment by Republican Representative Ron Paul and Democratic Representative Alan Grayson had earned support from more than half the members of the House. A similar measure in the Senate has 30 backers.
Lawmakers are likely to use the Fed audit proposal to vent frustration at the Fed's secrecy, its regulatory track record, and some of its actions during the crisis, but will eventually focus on regulatory reforms, analysts said.
'I don't think the Congress wants to run monetary policy,' said former Fed Vice Chairwoman Alice Rivlin. 'Now, there's a clear difference of opinion about how much prudential bank regulation the Fed should do.'
MAY BE REVISITED
Paul's advocacy of abolishing the Fed predates the crisis and he has said he will not vote for the evolving financial reform bill, even if it contains his provision, because it does not go far enough.
Opponents of his proposal may try to kill or weaken it by amending a wider bill to which it was attached when the full House considers the measure.
'That one may be revisited when we get to the (House) floor,' Representative Barney Frank, the chairman of the Financial Services Committee, said after the panel's vote.
Fed officials warn that the proposal could lead markets to expect increased political pressure on the central bank to hold unemployment low at the expense of keeping the lid on inflation. In turn, that could cause longer-term interest rates to rise and harm the economy, they say.
They also worry that naming borrowers from the Fed's lender-of-last-resort discount window -- as the proposal would allow -- would stigmatize the borrowers as weak and possibly prompt bank runs, defeating the purpose of emergency lending.
The central bank has been criticized in the past for being opaque and it has responded in recent years by publishing economic forecasts more frequently and issuing minutes of its meetings with a shorter lag. It already reports to Congress twice a year on monetary policy.
Still, Paul has tapped into a powerful upwelling in popular anger at the central bank. The Paul-Grayson proposal, which was approved 43-26 in Frank's committee, supplanted a compromise amendment Frank had engineered with senior committee Democrats but which never came to a vote.
'The Federal Reserve has conducted secret bailouts that range in the hundreds of billions of dollars ... This cannot go on any longer,' Grayson said in a statement after the vote.
Fed officials believe lawmakers do not understand how much the Fed is already audited by Congress or how much of a negative impact monetary policy audits would have, and they are likely to continue to lobby strongly against the proposal.
'What the Fed wants to avoid is having the current public anger institutionalized,' said Lou Crandall, chief economist for Wrightson ICAP in Jersey City, New Jersey.
CONSUMER PROTECTION AGENCY
Even if the measure passes in the House, it is not part of a competing proposal by Senate Banking Committee Chairman Chris Dodd. Assuming both chambers eventually approve financial reform legislation, a compromise between their differing bills would need to be hammered out, offering another opportunity to kill Paul's provision.
Dodd's bill, however, also takes aim at the central bank. It would strip the Fed of its regulatory authority in favor of a consolidated financial oversight agency.
Dodd and the panel's top Republican, Senator Richard Shelby, have said this would allow the Fed to concentrate on its central mission of monetary policy.
Fed officials, however, have argued they need the insight they gain through supervision to better safeguard the economy.
'Where you have monetary policy only at central banks ... what you find is whenever there's a financial crisis or bank run, the central bank comes to the table rather late in the game,' said former Fed Governor Susan Phillips, dean of the George Washington University School of Business.
'Every central bank that's been through a financial crisis wants to get involved in regulation.'
(Editing by Kenneth Barry)
((For more on regulatory reform proposals that would impact the Fed, please click on))
((For more stories on Fed policy, please double click on )) Keywords: USA FED/CONGRESS (kevin.drawbaugh@thomsonreuters.com, +1 202 898 8390, +1 202 488 3459 (fax)) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.