Fed's Dudley: Opposes Move In Congress To Audit Rate Policy
NEW YORK (Dow Jones)--A top Federal Reserve official mounted on Wednesday a defense against moves in Congress to audit the central bank's monetary policy activities, and he also cautioned against taking away the institution's banking supervisory capacity.
"What is fundamentally at issue here is not 'turf,' but rather how we as a nation can best ensure that we never again relive the events of the past few years," Federal Reserve Bank of New York President William Dudley said of the ongoing process of reform.
Dudley is the vice chairman of the interest rate-setting Federal Open Market Committee.
His comments came from the text of a speech prepared for delivery before the Partnership for New York City.
Much of the address covered familiar areas for central bank officials, with Dudley advocating an overhaul of the financial regulatory system that would do a better job of addressing the overall level of risk now found in the financial system.
"We need a new regulatory structure that provides for comprehensive and consistent oversight of all elements of the financial system," he said.
"This includes effective consolidated oversight of all our largest and interconnected financial institutions and oversight of payment and settlement systems," Dudley said.
But as this process moves forward, Dudley noted worry about what could happen to the Fed.
His chief worry centered on a move in Congress to audit the Fed's interest rate-setting mission.
"My principal concern is the damage that could potentially result to the Fed's ability to achieve its mandate of price stability and maximum sustainable employment,"
Dudley said, because the audits would be "a potential first step toward the politicization of a process that Congress has carefully sought to insulate from political pressures."
If markets were to believe the Fed was setting policy based on the desires of the political process, that policy would be less effective, the official explained.
Dudley also said actions that would take from the Fed its bank supervision and regulatory portfolios would also be misguided.
"Further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system," he said.
The official noted "there are clear synergies between the supervisory process and the Federal Reserve's monetary policy and financial stability missions."
Taking away these powers would make central bank monetary policy less effective, Dudley warned.
Dudley addressed the economic outlook briefly. "Financial markets have stabilized, and the prospect of a collapse of the financial system and a second Great Depression now seems extremely remote," the official said.
But, "credit remains tight." What's more, "economic growth has resumed, but unemployment has climbed to punishing levels," the official said, adding "while circumstances have improved, they are still very far from where we want them to be."
The official spoke ahead of next week's FOMC policy meeting. While the central bank is unlikely to make any major changes in its policy stance then, officials are still considering the fate of the Fed's mortgage asset buying program, which is scheduled to conclude at the end of March. Some officials appear to be leaning toward keeping the initiative alive for longer, fearing that its end will drive up borrowing costs at a time where the economic recovery remains uncertain.
But most Fed officials, at least so far, appear to support an end to the program as planned. In an interview last week with U.S. public television, Dudley put his lot in with the latter camp, saying "as the economy starts to improve, it seems prudent to us to start to gradually pull back on those programs." He went on to acknowledge the likely move higher in borrowing rates that will come with the Fed's exit, and flagged the uncertainty of that impact. Dudley also said if mortgage rates "were to back up a lot" and weigh on growth "we very well could rethink" the program's end.
At some point the Fed will also have to weigh what it does with what's now a zero percent funds rate. Few economists see any imminent move to bump rates higher until later this year, if not longer. Dudley also said in the television interview the Fed's commitment to keep rates low for an "extended period" means rates will stay very low for at least six more months.
-By Michael S. Derby, Dow Jones Newswires; 212-416-2214; michael.derby@dowjones.com
online.wsj.com
|
