House Financial Services – Monetary Policy Subcommittee Hearing on Federal Reserve Governance
House Financial Services – Monetary Policy and Trade Subcommittee Hearing
“Examining the Federal Reserve’s Mandate and Governance Structure”
Tuesday, April 4, 2017
Key Topics & Takeaways
- Federal Reserve Governance: Numerous Republicans on the subcommittee expressed support for governance changes at the Federal Reserve (the Fed). Several witnesses discussed the impact of broadening the Federal Reserve’s Open Market Committee (FOMC) to allow more voting by Reserve Bank presidents, and deplored what they called a “concentration” of power within the Federal Reserve Board of Governors.
- Federal Reserve’s Dual Mandate: Throughout the hearing, Calomiris and Levy criticized the dual mandate for being overly vague, while Spriggs defended the dual mandate, arguing that price stability and employment levels were interconnected issues. Republican Representatives were generally critical of the dual mandate, and Calomiris argued the Fed functioned better in the 1990s, when it overwhelmingly focused on its price stability mission.
- Federal Reserve’s Balance Sheet: Republicans criticized the size of the Fed’s balance sheet, and asked about the impact of Fed asset purchases on the economy. While all witnesses agreed that asset purchases helped stabilize the economy from 2008-2009, Calomiris and Levy argued the impact of quantitative easing (QE) since then has been mixed at best, and primarily served to support prices of mortgage-backed securities (MBS).
Witnesses
- Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School
- The Honorable William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
- Dr. Mickey Levy, Chief Economist for Americas and Asia, Berenberg Capital Markets LLC
Opening Statements
In his opening statement, Subcommittee Chairman Andy Barr (R-Ky.) stressed that the economy has slowed down and that after a decade of non-conventional policies from the Federal Reserve, “we are tired of waiting.” He continued that “eye-popping” fiscal stimulus was supposed to create a robust economy, in addition to budget “blowouts” and unconventional monetary policy promising “something better,” but that results have been disappointing. Barr stated that the first step to ending non-conventional policies from the Fed is to have more disciplined and transparent monetary policy, and to “stop asking for policy miracles.”
Subcommittee Ranking Member Gwen Moore (D-Wis.) stated that it is “odd” to think that labor and inflation are not linked, and that it is “counterproductive” for the Fed to turn a “blind eye” to employment. She continued that the Dodd-Frank Act made changes to the Fed, and ended bailouts, adding that she has “no regrets” about the bill. Moore explained that she is “increasingly anxious” about infusing politics into the Fed, to include creating unworkable rules to monetary policy and restructuring the Fed to give the interests of banks more weight in decision making. She continued that “the industry is moving to diversify and so should the Fed,” and that while their decisions may have been unconventional, they have been “largely helpful.”
Rep. Mia Love (R-Utah) stated that giving the Fed multiple objectives has created unsatisfactory outcomes, and that while Fed Chair Janet Yellen supports the dual mandate, it is an open question of whether the Fed should be tasked with supporting both objectives.
Rep. Tom Emmer (R-Minn.) stated that the Fed’s bailout of financial institutions lowered interest rates to “historical lows,” and that there is confusion in the markets due to the Fed’s dual mandate, adding that there is a need to “chart a new course” for the Fed.
Testimony
Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School
In his testimony, Calomiris accused the Fed of failing to achieve its central objects, price stability and financial stability, adding that it is necessary to address the deficiencies in the financial system that create “subpar results.” He continued that the Fed’s failure to maintain financial stability is related to its failure to maintain price stability, and argued that “politicization” of the Fed is a root cause of this. Calomiris stressed three areas of reform that are needed with the Fed: 1) internal governance, to include the way it communicates policies and the structure and operation of the Fed; 2) policy processes that narrow the mandate to price stability; and 3) other reforms that constrain the Fed’s asset holdings and activities. He concluded that improving the Fed’s primary mission of price stability is “long overdue.”
In his testimony, Spriggs explained that the Humphrey-Hawkins Full Employment Act gave the Fed instructions for full employment with price stability. He stressed that the economy can “overheat” when trying to get full employment by accelerating inflation, and that ignoring the threat of deflation is as “dangerous” as ignoring the acceleration of inflation. Spriggs continued that one of the problems with the Fed is that it is made up of and owned by banks, giving it a one-sided view of the economy. He added that the Fed cannot achieve full employment by themselves, and that the austerity that was pursued after the initial stimulus is why the current recovery is “unique.” Spriggs explained that the Fed is looking at the lessons learned from the Bank of Japan and sees that quantitative easing (QE) is a tool they should use.
Dr. Mickey Levy, Chief Economist for Americas and Asia, Berenberg Capital Markets LLC
In his testimony, Levy focused on the Fed’s balance sheet, explaining that while their asset purchases during the financial crisis were “emergency measures,” subsequent QE asset purchases, especially QE3, have served no economic purpose and are “very risky.” He criticized the Fed for having $1.8 trillion in mortgage-backed securities (MBS) on its balance sheet, and discussed how the $4.5 trillion total balance sheet gives a “false impression” to Congress that it is reducing the budget deficit in a riskless way. Levy continued that the balance sheet exposes the government and taxpayers to large losses, “blurs” the role of monetary and fiscal policies, and jeopardizes the Fed’s capabilities and independence. He recommended the Fed gradually and predictably unwind its holdings, as this will enhance economic performance and create a healthier banking system. Levy argued that the economy would have continued growing and jobs would still be created without QE, and that QE has “bloated” the balance sheet.
Question & Answer
Barr began by asking if the U.S. economy would benefit from what he called “greater diversity of thought” on the Federal Reserve’s Open Market Committee (FOMC). Calomiris said yes, and that the lack of dissent on decisions is a sign that the Fed’s power structure is “overly centralized.” Calomiris supported expanding voting rights on monetary policy to all the Federal Reserve Regional Bank Presidents, and called for an end to a Dodd-Frank Act restriction on Class A directors’ participation in the selection of Reserve Bank presidents.
Moore criticized the idea of using a “formula” for setting monetary policy, an idea several witnesses discussed in their written testimony. She then asked Spriggs about ensuring a “diversity of opinions” on the FOMC, and Spriggs argued that the Fed should have Governors with housing policy experience, to help the middle class.
Rep. French Hill (R-Ark.) asked about the “concentration of power” at the Fed, and noted that in the private sector, independent directors are common on corporate boards, and are valued for their ability to bring new ideas and opinions to the table. Calomiris said that Fed Presidents should be empowered to participate in policy decision-making, and be given their own staff and counsels to conduct research.
On several occasions, Calomiris also argued that antitrust review of bank mergers and enforcement of the Community Reinvestment Act (CRA) should be removed from the Fed’s purview, as these activities distract from its monetary policy mission.
Federal Reserve’s Dual Mandate
Throughout the hearing, Calomiris and Levy criticized the dual mandate for being overly vague, while Spriggs defended the dual mandate, arguing that price stability and employment levels were interconnected issues. Love asked if the Fed’s dual mandate hurt economic performance, and asked what the impact on employment would be if the Fed focused exclusively on its inflation targets. Calomiris argued that focusing on price stability would do more to maximize employment than the current dual mandate. Calomiris argued that recognition lag and implementation lag of Fed decisions reduce their ability to impact markets to achieve dual mandate objectives.
Emmer also asked if the Fed should focus on price stability and forgo its dual mandate. Calomiris said that the dual mandate provides an insufficiently clear guide for Fed governors and that the Fed should have a single prime mandate (price stability) with all other objectives relegated to this. Calomiris argued that employment mandate of the Fed gives the organization “too much discretionary power” and accused the Fed of “politicizing its unemployment mandate.” Calomiris also called for a legislative definition of the term “price stability.”
Warren Davidson (R-Ohio) asked if the dual mandate allows the Fed to “hide from accountability” to which Levy agreed. Levy argued the Fed’s post-crisis actions have stepped into the realm of fiscal policy, and that the steps necessary to boost employment are outside the scope of what monetary policy can achieve.
Barr described the size of the Fed’s balance sheet, with $1.8 trillion in mortgage-backed securities (MBS), and asked if the wider participation by Fed Presidents would lead to a smaller balance sheet. Levy agreed that the Fed needs an “evenhanded balance of power” between Fed Presidents and the FOMC, and believes these governance changes would lead to quicker reductions in the size of the balance sheet.
Rep. Roger Williams said that the “Fed has stepped well outside” its purview with regards to its balance sheet size, and argued that the large amount of MBS and Treasuries on the balance sheet serve “no good economic purpose.” Levy agreed and said that the current balance sheet size was both “damaging and risky” because an interest rate increase could generate large balance sheet losses. Williams asked if the balance sheet compromised the independence of monetary policy, which Levy agreed with. Levy argued that quantitative easing (QE) pushed the Fed into the domain of fiscal policy, which creates credibility problems for the Fed. Additionally, the $1.8 trillion in MBS held by the Fed constitutes credit allocation, which is beyond the dual mandate. Williams also asked about the Fed’s payment of above-market rates of interest on bank reserves, and Calomiris said this both violates the Fed’s statutory requirements and constitutes a subsidy for banks not to lend.
Rep. Juan Vargas asked if the Fed’s large scale asset purchases created stability. Spriggs agreed that they did create stability in the housing sector. Calomiris argued that while some research shows QE1 had a stabilizing effect, QE2 and QE3 failed in their stated objectives and only served to subsidize MBS. Levy said there was “no question” that asset-backed purchases in the crisis helped stabilize the economy. However, asset purchases since 2009 have not boosted growth and may have been detrimental. Vargas pointed out that if asset purchases provided stability during the crisis, that this was an argument for granting the Fed wider flexibility in its activates.
Hill said the Fed is “running the largest hedge fund in the world” with its large portfolio of MBS. He asked how the Fed might unwind the balance sheet, and Levy said the Fed should strictly purchase Treasuries from now on, begin a passive roll off-of MBS, and swap MBS for Treasuries.
For more information on this hearing, please click here.
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House Financial Services – Monetary Policy and Trade Subcommittee Hearing
“Examining the Federal Reserve’s Mandate and Governance Structure”
Tuesday, April 4, 2017
Key Topics & Takeaways
- Federal Reserve Governance: Numerous Republicans on the subcommittee expressed support for governance changes at the Federal Reserve (the Fed). Several witnesses discussed the impact of broadening the Federal Reserve’s Open Market Committee (FOMC) to allow more voting by Reserve Bank presidents, and deplored what they called a “concentration” of power within the Federal Reserve Board of Governors.
- Federal Reserve’s Dual Mandate: Throughout the hearing, Calomiris and Levy criticized the dual mandate for being overly vague, while Spriggs defended the dual mandate, arguing that price stability and employment levels were interconnected issues. Republican Representatives were generally critical of the dual mandate, and Calomiris argued the Fed functioned better in the 1990s, when it overwhelmingly focused on its price stability mission.
- Federal Reserve’s Balance Sheet: Republicans criticized the size of the Fed’s balance sheet, and asked about the impact of Fed asset purchases on the economy. While all witnesses agreed that asset purchases helped stabilize the economy from 2008-2009, Calomiris and Levy argued the impact of quantitative easing (QE) since then has been mixed at best, and primarily served to support prices of mortgage-backed securities (MBS).
Witnesses
- Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School
- The Honorable William Spriggs, Chief Economist, AFL-CIO and Professor, Department of Economics, Howard University
- Dr. Mickey Levy, Chief Economist for Americas and Asia, Berenberg Capital Markets LLC
Opening Statements
In his opening statement, Subcommittee Chairman Andy Barr (R-Ky.) stressed that the economy has slowed down and that after a decade of non-conventional policies from the Federal Reserve, “we are tired of waiting.” He continued that “eye-popping” fiscal stimulus was supposed to create a robust economy, in addition to budget “blowouts” and unconventional monetary policy promising “something better,” but that results have been disappointing. Barr stated that the first step to ending non-conventional policies from the Fed is to have more disciplined and transparent monetary policy, and to “stop asking for policy miracles.”
Subcommittee Ranking Member Gwen Moore (D-Wis.) stated that it is “odd” to think that labor and inflation are not linked, and that it is “counterproductive” for the Fed to turn a “blind eye” to employment. She continued that the Dodd-Frank Act made changes to the Fed, and ended bailouts, adding that she has “no regrets” about the bill. Moore explained that she is “increasingly anxious” about infusing politics into the Fed, to include creating unworkable rules to monetary policy and restructuring the Fed to give the interests of banks more weight in decision making. She continued that “the industry is moving to diversify and so should the Fed,” and that while their decisions may have been unconventional, they have been “largely helpful.”
Rep. Mia Love (R-Utah) stated that giving the Fed multiple objectives has created unsatisfactory outcomes, and that while Fed Chair Janet Yellen supports the dual mandate, it is an open question of whether the Fed should be tasked with supporting both objectives.
Rep. Tom Emmer (R-Minn.) stated that the Fed’s bailout of financial institutions lowered interest rates to “historical lows,” and that there is confusion in the markets due to the Fed’s dual mandate, adding that there is a need to “chart a new course” for the Fed.
Testimony
Dr. Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia Business School
In his testimony, Calomiris accused the Fed of failing to achieve its central objects, price stability and financial stability, adding that it is necessary to address the deficiencies in the financial system that create “subpar results.” He continued that the Fed’s failure to maintain financial stability is related to its failure to maintain price stability, and argued that “politicization” of the Fed is a root cause of this. Calomiris stressed three areas of reform that are needed with the Fed: 1) internal governance, to include the way it communicates policies and the structure and operation of the Fed; 2) policy processes that narrow the mandate to price stability; and 3) other reforms that constrain the Fed’s asset holdings and activities. He concluded that improving the Fed’s primary mission of price stability is “long overdue.”
In his testimony, Spriggs explained that the Humphrey-Hawkins Full Employment Act gave the Fed instructions for full employment with price stability. He stressed that the economy can “overheat” when trying to get full employment by accelerating inflation, and that ignoring the threat of deflation is as “dangerous” as ignoring the acceleration of inflation. Spriggs continued that one of the problems with the Fed is that it is made up of and owned by banks, giving it a one-sided view of the economy. He added that the Fed cannot achieve full employment by themselves, and that the austerity that was pursued after the initial stimulus is why the current recovery is “unique.” Spriggs explained that the Fed is looking at the lessons learned from the Bank of Japan and sees that quantitative easing (QE) is a tool they should use.
Dr. Mickey Levy, Chief Economist for Americas and Asia, Berenberg Capital Markets LLC
In his testimony, Levy focused on the Fed’s balance sheet, explaining that while their asset purchases during the financial crisis were “emergency measures,” subsequent QE asset purchases, especially QE3, have served no economic purpose and are “very risky.” He criticized the Fed for having $1.8 trillion in mortgage-backed securities (MBS) on its balance sheet, and discussed how the $4.5 trillion total balance sheet gives a “false impression” to Congress that it is reducing the budget deficit in a riskless way. Levy continued that the balance sheet exposes the government and taxpayers to large losses, “blurs” the role of monetary and fiscal policies, and jeopardizes the Fed’s capabilities and independence. He recommended the Fed gradually and predictably unwind its holdings, as this will enhance economic performance and create a healthier banking system. Levy argued that the economy would have continued growing and jobs would still be created without QE, and that QE has “bloated” the balance sheet.
Question & Answer
Barr began by asking if the U.S. economy would benefit from what he called “greater diversity of thought” on the Federal Reserve’s Open Market Committee (FOMC). Calomiris said yes, and that the lack of dissent on decisions is a sign that the Fed’s power structure is “overly centralized.” Calomiris supported expanding voting rights on monetary policy to all the Federal Reserve Regional Bank Presidents, and called for an end to a Dodd-Frank Act restriction on Class A directors’ participation in the selection of Reserve Bank presidents.
Moore criticized the idea of using a “formula” for setting monetary policy, an idea several witnesses discussed in their written testimony. She then asked Spriggs about ensuring a “diversity of opinions” on the FOMC, and Spriggs argued that the Fed should have Governors with housing policy experience, to help the middle class.
Rep. French Hill (R-Ark.) asked about the “concentration of power” at the Fed, and noted that in the private sector, independent directors are common on corporate boards, and are valued for their ability to bring new ideas and opinions to the table. Calomiris said that Fed Presidents should be empowered to participate in policy decision-making, and be given their own staff and counsels to conduct research.
On several occasions, Calomiris also argued that antitrust review of bank mergers and enforcement of the Community Reinvestment Act (CRA) should be removed from the Fed’s purview, as these activities distract from its monetary policy mission.
Federal Reserve’s Dual Mandate
Throughout the hearing, Calomiris and Levy criticized the dual mandate for being overly vague, while Spriggs defended the dual mandate, arguing that price stability and employment levels were interconnected issues. Love asked if the Fed’s dual mandate hurt economic performance, and asked what the impact on employment would be if the Fed focused exclusively on its inflation targets. Calomiris argued that focusing on price stability would do more to maximize employment than the current dual mandate. Calomiris argued that recognition lag and implementation lag of Fed decisions reduce their ability to impact markets to achieve dual mandate objectives.
Emmer also asked if the Fed should focus on price stability and forgo its dual mandate. Calomiris said that the dual mandate provides an insufficiently clear guide for Fed governors and that the Fed should have a single prime mandate (price stability) with all other objectives relegated to this. Calomiris argued that employment mandate of the Fed gives the organization “too much discretionary power” and accused the Fed of “politicizing its unemployment mandate.” Calomiris also called for a legislative definition of the term “price stability.”
Warren Davidson (R-Ohio) asked if the dual mandate allows the Fed to “hide from accountability” to which Levy agreed. Levy argued the Fed’s post-crisis actions have stepped into the realm of fiscal policy, and that the steps necessary to boost employment are outside the scope of what monetary policy can achieve.
Barr described the size of the Fed’s balance sheet, with $1.8 trillion in mortgage-backed securities (MBS), and asked if the wider participation by Fed Presidents would lead to a smaller balance sheet. Levy agreed that the Fed needs an “evenhanded balance of power” between Fed Presidents and the FOMC, and believes these governance changes would lead to quicker reductions in the size of the balance sheet.
Rep. Roger Williams said that the “Fed has stepped well outside” its purview with regards to its balance sheet size, and argued that the large amount of MBS and Treasuries on the balance sheet serve “no good economic purpose.” Levy agreed and said that the current balance sheet size was both “damaging and risky” because an interest rate increase could generate large balance sheet losses. Williams asked if the balance sheet compromised the independence of monetary policy, which Levy agreed with. Levy argued that quantitative easing (QE) pushed the Fed into the domain of fiscal policy, which creates credibility problems for the Fed. Additionally, the $1.8 trillion in MBS held by the Fed constitutes credit allocation, which is beyond the dual mandate. Williams also asked about the Fed’s payment of above-market rates of interest on bank reserves, and Calomiris said this both violates the Fed’s statutory requirements and constitutes a subsidy for banks not to lend.
Rep. Juan Vargas asked if the Fed’s large scale asset purchases created stability. Spriggs agreed that they did create stability in the housing sector. Calomiris argued that while some research shows QE1 had a stabilizing effect, QE2 and QE3 failed in their stated objectives and only served to subsidize MBS. Levy said there was “no question” that asset-backed purchases in the crisis helped stabilize the economy. However, asset purchases since 2009 have not boosted growth and may have been detrimental. Vargas pointed out that if asset purchases provided stability during the crisis, that this was an argument for granting the Fed wider flexibility in its activates.
Hill said the Fed is “running the largest hedge fund in the world” with its large portfolio of MBS. He asked how the Fed might unwind the balance sheet, and Levy said the Fed should strictly purchase Treasuries from now on, begin a passive roll off-of MBS, and swap MBS for Treasuries.
For more information on this hearing, please click here.