Congress puts the Fed under a microscope

The Federal Reserve is facing increasing pressure from lawmakers to change the way it conducts business.

On Tuesday, the Fed was facing rightward pressure from a number of fronts. At the House Financial Services Committee, a panel convened several experts for what essentially amounted to a second-guessing of the Fed’s efforts to steer the economy through the recession.

{mosads}At the same time, the House Oversight Committee revived the “Audit the Fed” campaign, advancing legislation that would allow external review of the central bank’s policy decisions.

In an election year when both parties are appealing to populist strains, the Fed remains on the hot seat in Congress.

Specifically, the Financial Services hearing was focused on the Fed’s policy of paying interest on excess reserves held at the central bank by private banks, and how the Fed could tweak that policy to steer interest rates.

The topic has come about because after the Fed bought up hundreds of billions of dollars of bonds during its stimulus efforts, its ability to alter rates via more traditional means have become muted.

Some lawmakers in both parties have aired skepticism about the tactic, questioning whether higher interest payments amount to a subsidy to the nation’s largest banks. Fed Chairwoman Janet Yellen has pushed back against that idea, describing it more as another policy tool for it to deploy to control interest rates.

For experts wary of the unprecedented “quantitative easing” pursued by the Fed, the murky path forward is chickens coming home to roost.

“The fact that they find it so difficult to reduce the balance sheet shows you one of the concerns that many of us had about increasing the balance sheet,” said John Taylor, a Stanford economist many thought would have led the Fed in a Romney administration. “It’s almost a kind of ‘I told you so’ kind of thing. Although I’m not doing that here.”

And at the Oversight panel, Tuesday’s mark-up showed that the “Audit the Fed” movement remains alive and well within Congress, despite recent setbacks. In January, the Senate narrowly rejected a similar bill from Sen. Rand Paul (R-Ky.). The defeat of that bill came after the House had mustered large bipartisan majorities for such an idea in previous Congresses.

But Massie’s bill is now heading to the House floor, making it the latest in a series of attempts to bring the Fed’s closely guarded policy deliberations under external review by the Government Accountability Office. The idea, first cooked up by former Rep. Ron Paul (R-Texas), has been fiercely opposed by the Fed, which argues it would expose the institution to dangerous political pressure.

The second-guessing of Fed operations is not the exclusive purview of the right. Less than a week before Republicans challenged the central bank’s operations, a host of influential congressional Democrats took issue with a separate aspect of the institution.

Eleven senators and 116 House Democrats sent a letter to the Fed, calling it to boost the diversity within its powerful ranks quickly. Arguing that the Fed cannot effectively steer the economy for all Americans when most of its top positions are filled by white men, the lawmakers pushed for a range of new blood at the Fed, spanning racial, economic, and professional backgrounds. The letter was signed by several Democratic heavyweights, including Sen. Elizabeth Warren (D-Mass.).

At the same time, both Democratic presidential candidates — Bernie Sanders and Hillary Clinton — said they would like to see the role of private bankers reduced at the Fed.

To further complicate matters, Sanders said Monday that the Fed should step in and make an emergency loan to ailing Puerto Rico, which is struggling with an acute debt crisis. The big bank critic argued that if the Fed could step up for the biggest names in finance during the 2008 crisis, they could do the same for the 3.5 million Americans facing an economic disaster on the island.

For its part, the Fed has told lawmakers it cannot come to Puerto Rico’s aid, writing in a letter sent to Rep. Brad Sherman (D-Calif.) last week that the Fed cannot unilaterally loan to a struggling municipality.

“The Federal Reserve does not have the legal authority to lend to a specific borrower, including a municipality, that is failing or seeking to avoid resolution,” wrote Yellen. “More generally, providing assistance to municipalities inherently involves political judgments.”

The Fed is not without its defenders in Congress. At Tuesday’s hearing at Financial Services, Rep. Jim Himes (D-Conn.) laid into efforts to question how the central bank conducts policy. He argued that the Fed’s record during the recession should grant it some breathing room from policymakers.

“I can’t help but feel that this hearing, and the ongoing Fed bashing by my Republican friends…the legacy of those that join in this effort will be to erode the cornerstone of this country’s economy,” he said.

All this political pressure comes at a time when the Fed is facing rocky waters within the institution as well. The central bank is trying to chart a path towards more normal interest rates, after years of basement-level borrowing costs. The central bank hiked rates in December — its first in nearly a decade — but has so far held off on any further action.

That leaves financial markets scouring each new Fed policy statement for hints for when further hikes could be coming. So far, economic drama across the globe has kept the Fed sidelined in that effort, though most experts anticipated at least one more rate hike this year.