The Federal Open Market Committee, the guiding policy committee of the Federal Reserve, is gaining increasing attention from lawmakers and politicians on both
But the Fed has critics on the left as well, one of which is Rep. Barney Frank (D-Mass.) whose position as ranking member on the House Financial Services Committee puts him in a position of oversight over the central bank.
On Monday, Frank released a position paper restating his proposal for reforming the FOMC. His central focus lies in regional bank presidents, five of which have a vote on the FOMC together with six permanent members and chairman Ben Bernanke. Frank believes the regional bank presidents represent an anti-democratic corporate influence over the nation’s most important economic institution.
There are twelve banks in the Federal Reserve System, and the president of each bank is selected by its board of directors. The nine-member boards of the regional Fed banks are comprised of three representatives from commercial banks, three representatives from the business community and three representatives from the broader public (although under the Dodd-Frank financial reform law, the banker members no longer have a role in selecting the president). This is why Frank and other Fed critics argue America’s monetary policy is set in part by people who are handpicked by business leaders to represent their interests.
Frank’s new position paper lays out his concerns:
For some time this has troubled me from a theoretical democratic standpoint. But several years ago it became clear that their [the regional bank presidents] voting presence on the FOMC was not simply an imperfection in our model of government based on public accountability, but was almost certainly a factor, influencing in a systematic way the decisions of the Federal Reserve. In particular, it seems highly likely to me that their voting presence on the Committee has the effect of skewing policy to one side of the Fed’s dual mandate—specifically that they were a factor moving the Fed to pay more attention to combating inflation than to the equally important, and required by law, policy of promoting employment.
The paper highlights the most recent statement from the FOMC, in which the committee said they would target low interest rates through 2013 in order to stimulate economic growth. When the statement was approved by the FOMC, there were three dissenting votes, which came exclusively from regional bank presidents. A 7-3 vote may seem like a relatively high amount of consensus when compared to the polarized votes of the Supreme Court or the U.S. House of Representatives. But historically, three dissenting votes is an unusually high number from a body that has preferred to maintain an aura of unanimity so as to reinforce the impact of its decisions on markets.
Frank suggests that the high level of political polarization that characterizes today’s political debates may have infected the FOMC. Business leaders, after all, tend to be ideologically conservative and vote Republican, and the dissenting votes all came from people selected in part by business leaders.
The suggestion that ideology may be motivating the dissenting votes makes sense when considering the growing belief among mainstream economists that inflation is below trend. Indeed, the Cleveland Fed’s most recent findings that inflation is expected to average at under 2 percent for the next ten years, leading some to question whether the Federal Reserve, tasked with a dual mandate of minimizing unemployment while maintaining price stability, has lost sight of the former while remaining excessively focused on the latter.
Christina Romer, a UC Berkeley economist and former chair of Obama’s Council of Economic Advisers, captured this sentiment when she wrote earlier this year that “[M]onetary policy makers are all [inflation] hawks now.”
Kenneth Rogoff, an economist at Harvard University and former chief economist of the IMF, has joined Romer in calling on the Fed to increase inflation: ”The only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years.”
Among economists, support for higher inflation is bipartisan. Greg Mankiw, a Harvard economist and adviser to Mitt Romney’s presidential campaign, wrote in the New York Times that the FOMC should “aim for a price level that rises 2 percent a year … [and] promise to pursue policies to get back to the target price path if shocks to the economy ever pushed the actual price level away from it.” While a more moderate proposal than Rogoff’s, a clear commitment to target prices is still considerably more stimulative than what the three August dissenters would presumably agree with.
Barney Frank’s proposal is unlikely to gain traction in a Republican-controlled House. With the leading GOP presidential candidates repeatedly saying that they oppose Bernanke’s tenure as Fed chair (with Gov. Rick Perry even suggesting that Bernanke’s efforts to stave off the recession in the wake of the 2008 crisis as “treasonous”), few are expecting Congress to push the Fed towards more inflation.
Frank has received pushback from those who say he is trying to concentrate Fed power in Washington. But he appears to be listening to these critics. Earlier this year, Frank proposed removing voting powers from the regional bank presidents on the FOMC, and leaving policy decisions up to the seven members appointed by the President. His new paper says he favors appointing board members from different parts of the country, as long as the business- and bank-controlled regional boards don’t have a say.
“I have finally taken into account the argument that some diversity from a geographic standpoint would be a good thing,” he says.
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