The Federal Reserve Bank of New York, which carried out central-bank rescues of money markets and Wall Street firms, is poised to have its powers expanded even more — at the risk of reduced independence.
Senate and House negotiators meet today to begin hammering out a financial-regulation bill that puts the New York Fed at the forefront of the central bank’s new role as overseer for financial stability. Lawmakers also want its chief, now nominated by the bank’s board, to be a White House appointee.
Senate Banking Committee Chairman Christopher Dodd says the selection process must be overhauled to avoid conflicts of interest at the regional Fed bank, which supervises firms including JPMorgan Chase & Co and Goldman Sachs Group, where New York Fed chief William Dudley spent two decades. Opponents, including St. Louis Fed President James Bullard, say the legislation represents an effort by politicians to exert more control over monetary policy.
“Congress is concerned about accountability,” Gary Stern, Minneapolis Fed president from 1985 to 2009, said in a telephone interview. “You would get a different kind of person in the job. I am an economist by training. You might continue to get some people like that. But you might get people who are more active politically.”
The so-called base text of the financial-overhaul legislation would give the central bank a seat on a newly created Financial Stability Oversight Council. The Fed would be delegated to watch over firms that ‘may pose risks to financial stability’, including banks it supervises and non-bank financial firms.
The New York Fed might have its authority extended to firms such as GE Capital. Jeffrey Immelt, chairman of General Electric Co, the parent of GE Capital, sits on the New York Fed Board.
Dodd’s proposal to have the regional Fed chief appointed to a five-year term subject to Senate approval means politicians would pick two-thirds of the Federal Open Market Committee (FOMC). Dudley, whose term ends in February, is vice chairman of the rate-setting panel. Of the Fed’s 12 regional bank presidents, he’s the only one with a permanent vote on the FOMC alongside the seven Washington-based governors.
The New York Fed executes monetary policy through its trading desk, which bought billions in bonds during the financial crisis. The Fed’s total assets have expanded to $2.33 trillion as it bought Treasury bonds, mortgage-backed securities and agency debt to lower interest rates. That compares with $903 billion two years ago.
Treasury Secretary Timothy Geithner, a former New York Fed president, said in March he opposes White House appointment because it “would tilt the balance substantially in New York’s favour.”
“What Congress ultimately wants out of this is loose money,” said Mark Calabria, a former Senate Banking Committee staffer who is now a director of financial-regulation studies at the Cato Institute in Washington, a research centre that favours free markets.
Bernard Sanders, a Vermont independent, said having the New York Fed president nominated by the White House “is a great thing” because it removes bankers from the decision.
