U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Committee on Banking, Housing and Urban Affairs, today made the following statement at a hearing on the Federal Reserve's Semiannual Monetary Report to the Congress.
Statement of Senator Richard C. Shelby
Committee on Banking, Housing and Urban Affairs
March 1, 2012
"Thank you, Mr. Chairman.
"Since the Federal Reserve took unprecedented actions in response to the financial crisis, there has been a growing recognition that the Fed needs to become more transparent. There was a time when central bankers met behind closed doors and stubbornly refused to inform the public of their decisions. Those days are clearly over.
"The public now rightly demands that policymakers not only explain their decisions, but also be accountable for their actions. This is especially true of the Fed, which, thanks to Dodd-Frank, now exercises even greater authority over the American economy and the lives of every American.
"To his credit, Chairman Bernanke has long recognized the need to modernize the Fed. In his first confirmation hearing, he stated that he believed making the Fed more transparent would "increase democratic accountability, promote constructive dialogue between policymakers and informed outsiders, and reduce uncertainty in financial markets and help anchor the public's expectations of long-run inflation.' During Chairman Bernanke's last Humphrey-Hawkins appearance, I noted that he has taken some important steps to improve the transparency of the FOMC, including holding press conferences to discuss monetary policy.
"Since then, the FOMC has taken another step to improve transparency by adopting an explicit inflation goal of two percent. This is a significant event in the history of the Fed. As Chairman Bernanke himself has stated, an explicit inflation target could reduce the public's uncertainty about monetary policy and more effectively anchor inflation expectations.
"Yet, it remains uncertain if the Fed's recently announced inflation goal will achieve these objectives. While the Fed was establishing its inflation goal, it was, at the same time, communicating contradictory signals about its commitment to that inflation target. The FOMC minutes reveal that Chairman Bernanke indicated that he believed the inflation goal would not represent a change in the FOMC's policy.
"In addition, the FOMC has stated that it believes economic conditions are "likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.' In other words, the Fed is signaling to market participants that it expects to continue its near-zero interest rate policy for at least three more years.
"This begs the question: is the FOMC focused on targeting low interest rates or its new inflation goal? If the inflation goal conflicts with keeping interest rates near zero, which target will prevail? In other words, why should market participants have confidence that the Fed is actually committed to achieving its inflation goal? And if the Fed is not serious about achieving its inflation goal, how will the Fed's credibility suffer when inflation rises above 2 percent?
"Accordingly, I hope that Chairman Bernanke can give the Committee more insight into how the FOMC's inflation goal will work in practice. I would also like to hear whether he believes Congress should hold the FOMC accountable for meeting its inflation goal.
"While the Chairman has taken steps to improve the transparency of the FOMC, the transparency of the Board of Governors appears to be getting worse. A recent Wall Street Journal article noted that the Board has held 47 separate votes on financial regulations since Dodd-Frank became law, yet they have held only two public meetings. The article noted that there has been a steady reduction in the number of open meetings by the Board since the early 1980s, when the Board had more than 30 open meetings. As a result, the Fed is making sweeping financial regulatory policy decisions behind closed doors. This is inconsistent with Chairman Bernanke's professed goal of making the Fed more transparent.
"In another troubling new development, the Fed recently decided to enter into the debate on housing policy. On January 4th, the Fed issued a white paper entitled "The U.S. Housing Market: Current Conditions and Policy Considerations.' The stated goal of the paper was "not to provide a blueprint, but rather to outline issues and tradeoffs that policymakers might consider.'
"However, subsequent actions by Fed officials suggest that the Fed has views about the policies Congress should enact. Just two days after the white paper was released, Fed Governor Elizabeth Duke gave a speech in which she advocated for specific housing polices and effectively asked the GSE conservator to ignore his statutory mandate to conserve and preserve assets of the GSEs. That same day, New York Fed President William Dudley gave a speech in which he argued that it would "make sense' for Fannie and Freddie to "routinely reduce principal' on delinquent mortgages using taxpayer dollars.
"These statements suggest that many at the Fed do in fact have a blueprint for housing market policy. That blueprint appears to involve using the taxpayer-supported GSEs as a piggybank.
"In weighing in on housing policy, certain Fed Governors have begun to take sides in what should be a Congressional policy debate. The Fed's independence for monetary policy has always been premised on it remaining nonpartisan and not advocating for specific legislative measures. The Fed has been and should continue to be a useful resource for information and analysis on the housing market. It should not, however, become an active participant in the legislative debate over the future of housing finance. Accordingly, I hope that the Fed's recent foray into housing policy will not become common practice.
"I believe Chairman Bernanke when he says that he believes the Fed is most effective when it is nonpartisan, transparent and accountable. I am interested to hear from Chairman Bernanke on how intends to continue to improve the Fed's performance on all three objectives.
"Thank you, Mr. Chairman."