The House Financial Services Subcommittee on Monetary Policy and Trade will hold a hearing on Wednesday on the Federal Reserve’s role in credit allocation.
As the central bank loosened monetary policy in response to the 2008 financial crisis, it pushed the federal funds rate to zero, though sluggish economic growth led it to engage in quantitative easing in which it purchased billions of dollars in long-term government securities and mortgage-backed securities to stimulate the economy.
The Fed said the asset purchases fulfilled its “dual mandate” of maintaining prices and reducing unemployment. According to the committee majority, chaired by Rep. Jeb Hensarling (R-Texas), the central bank’s engagement in QE “gives cause to re-examine the independence” of the U.S. central banking system.
“Independence preserves a central bank’s focus on price stability and protects a central bank from short-term political pressure to finance government spending,” the memorandum said.
The memorandum pointed to previous references by Fed Chairman Ben Bernanke to the 1951 accord between the Fed and U.S. Treasury that ended the central bank’s prior support for deficit spending during WWII, saying the accord was an important milestone in maintaining the Fed’s independence.
In recent years, the Fed has engaged in a credit allocation policy—according to the memorandum, “an objective distinct from its monetary policy mission,” in ways that “call into question its independence.”
The memorandum pointed to the Fed’s purchase of more than $2 trillion in Treasury obligations through its QE program, thereby lowering the cost of the Treasury’s borrowing.
“Over 40 percent of [the Treasury’s borrowing] is reset every two years at current interest rates, effectively making the Federal Reserve a financier and enabler of federal deficit spending,” the memorandum said, also pointing to the Fed’s purchase of more than $1.5 trillion in MBS to make it the owner of over 25 percent of outstanding MBS. “Finally, the Federal Reserve and other banking regulators have promulgated regulations like the Volcker Rule and negotiated international capital standards under Basel III that provide strong incentives for banks to crowd into certain asset classes, particularly sovereign debt.”
The hearing, which will be held at 10 a.m. in room 2128 in the Rayburn House Office Building, will explore whether a revision to the 1951 accord is “necessary to address the Federal Reserve’s participation in credit allocation policy.”
The subcommittee will hear testimony from Marvin Goodfriend, a Friends of Allan Meltzer professor of economics at Carnegie Melon University; Paul H. Kupiec, a resident scholar at the American Enterprise Institute; Lawrence White, a professor of economics at George Mason University; Josh Bivens, a research and policy director at the Economic Policy Institute.