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* Republicans see Fed as priority amid Wall St reforms
* Fed preparing for renewed push, could meet critics halfway
* "There are different paths" forward, congressman says
By Jonathan Spicer
NEW YORK, Dec 12 Republican lawmakers and the
Federal Reserve may be ready to strike a compromise deal on
legislation that would give Congress greater scrutiny over the
central bank, now that there is no longer the threat of a
presidential veto, but it would likely stop short of dictating
rules on setting interest rates.
Donald Trump's victory in the presidential election will
give the Republicans control over both the White House as well
as both houses of Congress next month, removing a likely veto on
legislation to overhaul governance of the Fed by a Democratic
president. Even so, Republicans will need support from Senate
Democrats now that their Senate majority has shrunk to a 52-48
split in the November polls.
Republicans who have been pushing for limits on the Fed's
ability to decide policy believe the central bank has
overstepped its mandate by using extraordinary measures to
stimulate the economy since the financial crisis, and they say
reforms are a priority next year. Interviews with lawmakers,
aides and top Fed officials indicate there could be common
ground for a deal, marking a possible departure from the central
bank's resolute opposition to reform.
"There are different paths to a workable solution," said
Representative Bill Huizenga, a Republican who chairs the House
of Representatives subcommittee on Monetary Policy and Trade.
Huizenga, who last year introduced legislation to tie policy
decisions to a benchmark rule or risk "audits" by a
congressional watchdog, told Reuters that he was "open to what
exactly" the audits would look like. "But it needs to be early,
if not the first thing that we do."
The Trump administration and the Federal Reserve declined to
comment on the potential for legislation or their positions.
Huizenga's bill last year would force the Fed to operate
under a directive rule like the one named after conservative
economist John Taylor, which prescribes interest rates based on
levels of inflation, employment and growth.
That would be a sea change from the way the Fed has long
operated, in which it reviews economic conditions as it weighs
decisions on interest rates, but is free to set policy as it
The bill would leave room for discretion but would open the
door for Congress to launch real-time reviews of rate decisions
if the central bank strayed too far from the rule, something Fed
Chair Janet Yellen called a "grave mistake" that would damage
the bank's credibility and distract its focus on longer term
Under a strict Taylor rule, the key federal funds rate - the
rate at which banks lend money to other banks on an overnight
basis - would be one to two percentage points higher now than it
is, based on calculations by the Federal Reserve Bank of
Huizenga's proposal is now part of a broader bill championed
by Jeb Hensarling, the influential Republican chair of the House
Financial Services Committee, to winnow back financial
regulations. Hensarling has called Fed reform a top priority and
said he was willing to negotiate.
Because any such legislation would typically require a
supermajority to pass the Senate, Republicans - who now hold
only a simple majority - will need to compromise in order to win
the support of some Democrats.
TRANSPARENCY VS OVERSIGHT
The Fed could find other ways to satisfy demands for more
insight. It could use its existing semi-annual reports to
Congress to cite an array of well-known monetary policy rules
and explain how it arrived at its decisions with reference to
That could provide the desired transparency and even
side-step the threat of probes by a congressional watchdog.
Another alternative would be to make these audits scheduled,
and not ad hoc, which could help curb any partisan challenges to
policy in real-time and preserve the Fed's flexibility during
Still, those regular reviews would allow Congress to see how
Federal Reserve policymakers sifted through economic data and
forecasts to reach rate decisions. Now that the Fed has begun
raising rates, Republicans complain it has offered a shifting
set of reasons to move slowly, including political turmoil and
market volatility overseas.
A hint of how compromise could be achieved came this summer
when the Cleveland Fed published a list of seven well-known
policy rules and showed that their recommended rates varied
between 0.14 percent and 3.08 percent.
The Fed's policy rate is now 0.25-0.5 percent and is
expected to rise a quarter point this week.
"We do look at a number of rules ... but monetary policy
isn't a simple thing," Cleveland Fed President Loretta Mester
said in a recent interview. "I hope that any change that
Congress pushes through is done in a thoughtful way and doesn't
disrupt the benefits that we have in the current system."
While there is no explicit reference to the Fed's swollen
balance sheet in proposed legislation, Hensarling and other
critics have called for a firm plan to sell off the $3.5
trillion in Treasury and mortgage bonds the central bank amassed
in the wake of the 2008 financial crisis. The bond purchases
were extraordinary measures taken to stimulate growth.
Many Republican lawmakers say bond purchases inappropriately
increases the Fed's role in the economy and amounts to financing
of the government, a measure that is banned under statutes.
Critics say the Fed's plan to shed assets once interest rates
have started normalizing is too vague, suggesting that could
work its way into increased congressional oversight.
HOLDING THE FED TO ACCOUNT
The Fed maintains that its policies have been transparent in
the face of a deep recession and frustratingly slow recovery.
Yellen and her colleagues also say the Fed can best achieve
its twin mandate of price stability, which it targets at 2
percent inflation, and maximum sustainable employment when free
of short-term political interference. It is close to both goals
Taken together, Republicans' pursuit of reforms makes future
Fed policy "a big global uncertainty," said Peter Hooper, a
former Fed official who is chief economist at Deutsche Bank
Securities. It could lead to more aggressive rate hikes than the
roughly two-per-year currently expected, and quicker trimming of
the balance sheet, he said.
Selling bonds, or even halting purchases of those maturing,
would raise market yields and amount to tighter monetary
Getting a Fed-reform bill into Trump's hands "will require a
consensus," said Representative Frank Lucas, another Republican
on the House Monetary Policy subcommittee. "To get there we
would need to explain to the Senate that this would not
constrain the Fed in any future crisis."
Lucas acknowledged concerns that the Taylor rule would
"dramatically alter" the Fed's flexibility, and told Reuters his
staff was considering possible adjustments to proposed bills.
That would appear to be something Huizenga could live with.
"They are already doing the analysis, so maybe it's asking
them to share that analysis," Huizenga told Reuters, adding he
hoped the election of Trump caused Fed leadership to "rethink
its stiff-arming" of reforms.
(Editing by David Chance and Leslie Adler)