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From Banking and Finance Law Daily, February 11, 2015

Outgoing Dallas Fed president slams “Audit the Fed” proposals

By Richard A. Roth, J.D.

Congressional proponents of “Audit the Fed” bills may be “sheep in wolves’ clothing,” according to Richard W. Fisher, President and CEO of the Dallas Federal Reserve Bank. Having failed to do their own job of creating an effective regulatory regime, they “find it convenient to create a bogeyman out of an entity that does its job efficiently,” he charges in remarks prepared for delivery to the Economic Club of New York. Fisher also notes that he soon will be retiring from the Dallas Fed.

While the core of Fisher’s remarks offers specific suggestions for making the operations of the Federal Open Market Committee more responsive to broader geographic concerns, he opens with pointed criticism of the “Audit the Fed” drive embodied in the Federal Reserve Transparency Act of 2015 (S. 264), sponsored by Sen. Rand Paul (R-Ky). Included in that criticism was an anecdote at the expense of Sen. Paul’s father, former Texas Congressman Ron Paul, who for some time introduced an “Audit the Fed” proposal at the beginning of each new Congress.

“I can think of nothing that would do more damage to our nation’s prosperity” than using Government Accountability Office audits of the Federal Reserve Board to interfere with the Fed’s management of monetary policy, Fisher warns.

Fed structural improvements. However, there are legitimate concerns about how the Federal Open Market Committee and the Federal Reserve System operate, Fisher believes, and those concerns should be addressed by distributing power more broadly. He makes three recommendations about how to do so.

First, Fisher says, the FOMC vice chairman’s seat should be rotated among all of the Federal Reserve Bank presidents on a two-year basis. Currently the New York Fed president holds the vice chairmanship on a permanent basis and, since the New York Fed’s trading desk also implements the Fed’s trading operations, this creates the appearance of a conflict of interest. The change could be accomplished conveniently by providing that the chair of the Fed’s Conference of Presidents would also be the FOMC vice chair.

Second, each systemically important financial institution should be supervised by a team drawn from a Federal Reserve Bank of a district different from the SIFI’s home, Fisher proposes. This again would eliminate any possible conflicts of interest. It also would allow participation by examiners from all 12 Federal Reserve districts, not from just two cities.

Third, Fisher advocates giving the FRBank presidents more voting power on the FOMC. Currently, the FRBank presidents have a total of five votes—one for the New York Fed president and four distributed on a rotating basis among the other 11 districts. “This makes no sense to me,” Fisher says; instead, six FRBank presidents always should have a vote, which would make the FRBanks’ voting power equal to that of the Fed governors other than the Fed chairman. The chairman then would have the tie-breaking vote.

Openness. Fisher wants the Fed chairman to hold a press conference after every FOMC meeting, rather than only four times each year. According to Fisher, the quarterly schedule effectively restricts the FOMC to monetary policy changes on a quarterly basis.

Inflation measures. The Dallas Fed President also takes the opportunity to advocate for the use of an inflation measure developed by his own bank: trimmed mean personal common expenditures. Currently, the Fed measures progress toward its 2-percent inflation target against personal common expenditures other than food and energy. Relying on the trimmed mean would give the FOMC a better way to gauge when to begin to raise the federal funds rate, in Fisher’s opinion.

Fisher says the Dallas Fed’s measure is better insulated against temporary swings in energy prices. It aligns better with “direct measures of trend headline inflation” that can only be seen after the fact, he claims, and it shows less systemic bias. According to Fisher, the current measure is like navigating by a compass that can be influenced by local anomalies in the magnetic field, while using the trimmed mean is like navigating by GPS.

Over the last 10 years, using the trimmed mean would have given policymakers a much more accurate measure to work with, according to Fisher.

MainStory: TopStory FederalReserveSystem

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