Federal, Oversight, Regulation

House subcommittee examines 100 years of Federal Reserve monetary policy

126px-US-FederalReserveSystem-Seal.svgThe House Financial Services Subcommittee on Monetary Policy and Trade kicked off a series of oversight hearings on Wednesday to examine the Federal Reserve’s monetary policy, in honor of the central bank’s 100th anniversary.

“Such an anniversary does not necessitate legislative reform of the institution, but it does provide an opportunity to reflect on the Fed’s statutory mission, responsibilities and capabilities,” Rep. John Campbell (R-Calif.), the chairman of the subcommittee on monetary policy and trade, said. “What was the Federal Reserve’s original mission and how did it implement its original tools? How has the Federal Reserve responded to economic booms and busts? What did the Federal Reserve do leading up to, during and in the wake of the 2008 financial crisis that is consistent with or is a departure from historical norms? What should the Federal Reserve do in its next one-hundred years?  It’s questions like these that our committee will be focused on during this oversight effort.”

During Wednesday’s hearing, the subcommittee focused on monetary policy over the past 100 years, particularly between the 1980s and 1990s, when the economy’s performance improved. Subcommittee members found that when the Fed failed to follow a “rules-based approach,” economic growth was slower.

The subcommittee also discussed the Fed’s emergency lending authority used to bail out financial institutions during the financial crisis. Some Dodd-Frank proponents maintain that the legislation limits the central bank’s emergency bailout authority.

Under Section 1101 of the law, emergency lending can only be performed in certain cases and for certain companies, and it must be secured by good collateral.

Marcus Stanley, the policy director of Americans for Financial Reform, said the language in the legislation is “far too broad and vague” to effectively limit the Fed’s emergency authority and prevent it from carrying out the same bailouts enacted in the financial crisis.

“The meaning of a ‘solvent’ institution or ‘good collateral’ is often in the eye of the beholder,” Stanley said in a June editorial, according to U.S. News. “And a program with ‘broad based eligibility’ can easily be structured to be especially beneficial to holders of a selected class of assets—for example, a program that allowed financial institutions to convert toxic securities into cash could be seen as ‘broad based,’ since anyone holding such securities would be eligible.”

The Fed, which was instructed under Dodd-Frank to write the bailout rules “as soon as practicable,” has yet to complete its rules.

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