House Financial Services Hearing on Federal Reserve Districts
House Financial Services Subcommittee on Monetary Policy and Trade
“Federal Reserve Districts: Governance, Monetary Policy, and Economic Performance”
Wednesday, September 7, 2016
Key Topics & Takeaways
- Role of Bankers on Reserve Bank Boards: Lacker and George defended the positions of bankers on Reserve Bank boards and insisted that there are sufficient controls in place to limit their influence.
- Rules-Based Monetary Policy: Lacker stated that the FOMC consults rules regularly, and that having a sense of the pattern of past behavior serves as an important benchmark. However, he warned against following any rule “slavishly.”
Witnesses
- Jeffrey M. Lacker, President and Chief Executive Officer, Federal Reserve Bank of Richmond
- Esther L. George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City
- Robert G. Jones, Chairman and Chief Executive Officer, Old National BanCorp
- William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
Opening Statements
Chairman Bill Huizenga (R-Mich.) was critical of Democrats who “have constantly resisted” reforms to increase the Federal Reserve’s accountability and of the accommodative monetary policy that has failed to produce benefits for the whole country. He called for “a better way” that would go against the centralization of monetary policy in the politicized Board of Governors by relying more on district banks. Huizenga argued that H.R. 3189, the Fed Oversight Reform and Modernization Act, would bring monetary policy out of the shadows by restoring the voices of the district banks.
Ranking Member Gwen Moore (D-Wis.) cautioned against proposals that “would disastrously inject partisan politics” into the Federal Reserve under the guise of increased congressional oversight. However, she stated that she is open to improving the diversity of thought at the Fed by exploring reforms that balance independence and public confidence.
Witness Testimony
Jeffrey M. Lacker, President and Chief Executive Officer, Federal Reserve Bank of Richmond
In his testimony, Lacker discussed the history of the creation of the Federal Reserve to justify its current structure. He emphasized that the final Federal Reserve Act “reflected a balance of competing considerations: a federated set of institutions to provide for representation of a diverse range of geographic and commercial interests, with a hybrid public-private governance structure to provide for public oversight but contain potential misuse of monetary authority.” He said the governance structure is still effective and argued that the federated structure has ensured that a diversity of perspectives on policy and economic conditions are considered while keeping focus on longer-term objectives.
Lacker also defended the positions of bankers on Reserve Bank boards, pointing to strict rules limiting their influence and stating that bankers are well-positioned to report on the economic conditions in different regions.
Esther L. George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City
George, in her testimony, stated that the Federal Reserve’s unique public/private structure designed to provide a system of checks and balances, and that while challenges to its design have surfaced at times, the country has remained confident in the structure. Acknowledging that some have questioned the role of commercial banks within the Fed structure, George noted that important safeguards exist to limit their influence. She stressed that supervision and regulation is the statutory responsibility of the congressionally-confirmed Board of Governors, and that no bank director can participate in supervisory matters.
Robert G. Jones, Chairman and Chief Executive Officer, Old National BanCorp
In his testimony, Jones called it “critically important” that bankers continue to serve as directors on Reserve Bank boards, arguing that their strong connections to their communities give them unique perspectives and help the Federal Reserve understand the needs of businesses and communities. He opined that any concerns about bankers’ presences giving them ability to control or manipulate institutions are adequately addressed by current procedures, and reiterated bankers’ “limited but crucial” role.
William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
Spriggs, in his testimony, supported the Federal Reserve’s accommodative monetary policy while criticizing Congress for its failure to do its part to aid the economic recovery with appropriate fiscal policy. He commented that much of the public criticism of the Fed’s policies stem from the unprecedented nature of Congress failing to act in concert by providing fiscal stimulus.
Spriggs stated that it is “fully possible” under current standards to have regional bank presidents who are open to public participation and listen to all voices in their regions, but that not all the presidents have done so. He stressed the need to find a way of ensuring that the Reserve Banks truly represent regional views and priorities.
Questions
Monetary Policy
Huizenga asked if the witnesses agreed that a sound monetary policy that focuses on low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor. George, Lacker and Jones all agreed, while Spriggs opined that a sound monetary policy should also seek to increase wages and reach full employment.
Role of Regional Bank Presidents
Huizenga asked if the regional bank presidents play an important role by bring in-depth knowledge on their districts. Lacker said all participants have a voice and bring regional perspectives, and George added that transcripts prove that a significant portion of conversations within the Federal Open Markets Committee (FOMC) focus on regional aspects.
Diversity
Moore asked whether having more diverse representation on the Federal Reserve Board would enhance the decision-making process in setting monetary policy. Lacker responded that diversity is “built into the structure” of the Federal Reserve, and that it has been a focus at the Reserve Bank of Richmond’s Board of Directors for several decades. Spriggs stated that the boards are experiencing “cultural capture” as a result of bankers’ control.
Rep. Ed Perlmutter (D-Colo.) asked what diversity means to the witnesses, suggesting considerations such as ethnicity and income. Lacker said there are multiple dimensions considered because the Reserve Banks want coverage from across industries, ethnicities, and gender.
Rules-Based Monetary Policy
Rep. Mick Mulvaney (R-S.C.) commented that the temptation of short-sighted monetary policies, as well as human error in economic predictions, could be addressed by a rules-based approach. Lacker answered that the FOMC consults rules regularly, and that having a sense of the pattern of past behavior serves as an important benchmark. However, he warned against following a rule “slavishly.” Spriggs agreed, saying that there are many moving parts to monetary policy and warning against binding the Federal Reserve to a rule.
Federal Reserve Districts
Rep. Bill Foster (D-Ill.) noted that the current Federal Reserve districts are “far from reflective” of population distributions and economic conditions. He questioned whether it might be effective to periodically redraw the boundaries. George replied that she does not think the districts handicap the Fed’s decision-making. Spriggs added that it is more important that the people of the district are represented on the Reserve Bank board, and not just bankers.
Reps. Denny Heck (D-Wash.) and Mia Love (R-Utah) also raised concerns with the current district boundaries and representation of the regions in setting monetary policy. Lacker insisted, however, that the Fed is deeply engaged in understanding challenges across the country and that changing the districts would not make a difference because a single monetary policy is set for the whole country.
For more information on this hearing, please click here.
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House Financial Services Subcommittee on Monetary Policy and Trade
“Federal Reserve Districts: Governance, Monetary Policy, and Economic Performance”
Wednesday, September 7, 2016
Key Topics & Takeaways
- Role of Bankers on Reserve Bank Boards: Lacker and George defended the positions of bankers on Reserve Bank boards and insisted that there are sufficient controls in place to limit their influence.
- Rules-Based Monetary Policy: Lacker stated that the FOMC consults rules regularly, and that having a sense of the pattern of past behavior serves as an important benchmark. However, he warned against following any rule “slavishly.”
Witnesses
- Jeffrey M. Lacker, President and Chief Executive Officer, Federal Reserve Bank of Richmond
- Esther L. George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City
- Robert G. Jones, Chairman and Chief Executive Officer, Old National BanCorp
- William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
Opening Statements
Chairman Bill Huizenga (R-Mich.) was critical of Democrats who “have constantly resisted” reforms to increase the Federal Reserve’s accountability and of the accommodative monetary policy that has failed to produce benefits for the whole country. He called for “a better way” that would go against the centralization of monetary policy in the politicized Board of Governors by relying more on district banks. Huizenga argued that H.R. 3189, the Fed Oversight Reform and Modernization Act, would bring monetary policy out of the shadows by restoring the voices of the district banks.
Ranking Member Gwen Moore (D-Wis.) cautioned against proposals that “would disastrously inject partisan politics” into the Federal Reserve under the guise of increased congressional oversight. However, she stated that she is open to improving the diversity of thought at the Fed by exploring reforms that balance independence and public confidence.
Witness Testimony
Jeffrey M. Lacker, President and Chief Executive Officer, Federal Reserve Bank of Richmond
In his testimony, Lacker discussed the history of the creation of the Federal Reserve to justify its current structure. He emphasized that the final Federal Reserve Act “reflected a balance of competing considerations: a federated set of institutions to provide for representation of a diverse range of geographic and commercial interests, with a hybrid public-private governance structure to provide for public oversight but contain potential misuse of monetary authority.” He said the governance structure is still effective and argued that the federated structure has ensured that a diversity of perspectives on policy and economic conditions are considered while keeping focus on longer-term objectives.
Lacker also defended the positions of bankers on Reserve Bank boards, pointing to strict rules limiting their influence and stating that bankers are well-positioned to report on the economic conditions in different regions.
Esther L. George, President and Chief Executive Officer, Federal Reserve Bank of Kansas City
George, in her testimony, stated that the Federal Reserve’s unique public/private structure designed to provide a system of checks and balances, and that while challenges to its design have surfaced at times, the country has remained confident in the structure. Acknowledging that some have questioned the role of commercial banks within the Fed structure, George noted that important safeguards exist to limit their influence. She stressed that supervision and regulation is the statutory responsibility of the congressionally-confirmed Board of Governors, and that no bank director can participate in supervisory matters.
Robert G. Jones, Chairman and Chief Executive Officer, Old National BanCorp
In his testimony, Jones called it “critically important” that bankers continue to serve as directors on Reserve Bank boards, arguing that their strong connections to their communities give them unique perspectives and help the Federal Reserve understand the needs of businesses and communities. He opined that any concerns about bankers’ presences giving them ability to control or manipulate institutions are adequately addressed by current procedures, and reiterated bankers’ “limited but crucial” role.
William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
Spriggs, in his testimony, supported the Federal Reserve’s accommodative monetary policy while criticizing Congress for its failure to do its part to aid the economic recovery with appropriate fiscal policy. He commented that much of the public criticism of the Fed’s policies stem from the unprecedented nature of Congress failing to act in concert by providing fiscal stimulus.
Spriggs stated that it is “fully possible” under current standards to have regional bank presidents who are open to public participation and listen to all voices in their regions, but that not all the presidents have done so. He stressed the need to find a way of ensuring that the Reserve Banks truly represent regional views and priorities.
Questions
Monetary Policy
Huizenga asked if the witnesses agreed that a sound monetary policy that focuses on low inflation and stable aggregate demand is the most likely to permanently improve conditions for the poor. George, Lacker and Jones all agreed, while Spriggs opined that a sound monetary policy should also seek to increase wages and reach full employment.
Role of Regional Bank Presidents
Huizenga asked if the regional bank presidents play an important role by bring in-depth knowledge on their districts. Lacker said all participants have a voice and bring regional perspectives, and George added that transcripts prove that a significant portion of conversations within the Federal Open Markets Committee (FOMC) focus on regional aspects.
Diversity
Moore asked whether having more diverse representation on the Federal Reserve Board would enhance the decision-making process in setting monetary policy. Lacker responded that diversity is “built into the structure” of the Federal Reserve, and that it has been a focus at the Reserve Bank of Richmond’s Board of Directors for several decades. Spriggs stated that the boards are experiencing “cultural capture” as a result of bankers’ control.
Rep. Ed Perlmutter (D-Colo.) asked what diversity means to the witnesses, suggesting considerations such as ethnicity and income. Lacker said there are multiple dimensions considered because the Reserve Banks want coverage from across industries, ethnicities, and gender.
Rules-Based Monetary Policy
Rep. Mick Mulvaney (R-S.C.) commented that the temptation of short-sighted monetary policies, as well as human error in economic predictions, could be addressed by a rules-based approach. Lacker answered that the FOMC consults rules regularly, and that having a sense of the pattern of past behavior serves as an important benchmark. However, he warned against following a rule “slavishly.” Spriggs agreed, saying that there are many moving parts to monetary policy and warning against binding the Federal Reserve to a rule.
Federal Reserve Districts
Rep. Bill Foster (D-Ill.) noted that the current Federal Reserve districts are “far from reflective” of population distributions and economic conditions. He questioned whether it might be effective to periodically redraw the boundaries. George replied that she does not think the districts handicap the Fed’s decision-making. Spriggs added that it is more important that the people of the district are represented on the Reserve Bank board, and not just bankers.
Reps. Denny Heck (D-Wash.) and Mia Love (R-Utah) also raised concerns with the current district boundaries and representation of the regions in setting monetary policy. Lacker insisted, however, that the Fed is deeply engaged in understanding challenges across the country and that changing the districts would not make a difference because a single monetary policy is set for the whole country.
For more information on this hearing, please click here.