Jeffrey Lacker of the Richmond Fed and Esther George of the Kansas City Fed appeared before a subcommittee of The House Financial Services Committee today to discuss Federal Reserve “independence.”
I say “independence” because The Fed governors and the Chair of the Fed are appointed by The President of the United States subject to confirmation by the US Senate. So, The Fed is really a public-private partnership.
Two regional Federal Reserve presidents defended the public-private structure of the U.S. central bank in prepared testimony they’re scheduled to deliver before lawmakers on Wednesday, saying it helps guard monetary policy from political interference.
“The Fed’s public-private structure supports monetary policy independence by ensuring a measure of apolitical leadership,” Jeffrey Lacker, president of the Richmond Fed, said in the text obtained by Bloomberg. Lacker and Esther George, head of the Kansas City Fed, are set to appear before a subcommittee of the House Financial Services Committee in Washington.
George said the Fed’s structure, created by Congress in 1913, “recognized the public’s distrust of concentrated power and greater confidence in decentralized institutions.”
The hearing, before the House Financial Services sub-committee on monetary policy and trade, will examine the governance of Federal Reserve banks and how it relates to the conduct of monetary policy and economic performance.
Calls for Fed reform have resonated in the U.S. presidential campaign, with Democratic party nominee Hillary Clinton joining calls for structural changes within the central bank and more diversity in the ranks of its leadership.
Excuse me Hillary. President Clinton The First, President Bush and President Obama have all had the opportunity to appoint minorities as Fed governors, but have chosen not to.
The Federal Reserve System is supervised by the Board of Governors. Located in Washington, D.C., the Board is a federal government agency consisting of seven members appointed by the President of the United States and confirmed by the U.S. Senate..
Be that as it may, let’s look at The Fed’s reactions to previous bubbles in the economy.
Let’s take a look at the stock market bubble of the Clinton Administration. The “dot.com” bubble form and started to burst in March 2009. The Fed reacted by raising The Fed Funds Target rate. But starting in January 2001, The Fed began an unprecedented lowering of their target rate from 6.50% to 1.75% (all in 2001). The Fed continued to lower their benchmark rate through 2002-2003 down to 1.00%. Kiss the dot.com bubble goodbye.
By 2004, home prices were rising rapidly. Over the next two years, The Fed raised The Fed Funds Target rate from 1.0% to 5.25% … just as home prices peaked in mid-2006.
Starting in September 2007, The Fed began rapidly decreasing their benchmark rate over the next year until it reached 0.25% where it remained until December 2015.
Now we have the NASDAQ stock market index at a higher level than during the dot.com bubble and home prices, while not back to home price bubble highs, are rising rapidly again.
This time, The Fed has the look of “deer in the headlights” and is simply too afraid to move.
My suggestion? The House Financial Services Committee should continue to push for a transparent rule for The Fed governing their monetary policies. Not necessarily the Taylor Rule, but something like so investors and citizens get an idea of what is going to happen.
But without more transparency (AHEAD of Fed minutes being released), we are playing Joker Poker with financial markets and the economy.