Facing perhaps the biggest loss of power in the institution's nearly 100-year history, the Federal Reserve fought back today with a little-noticed move that seemed to send a message to Congress: we use our oversight authority over banks to help us shape the direction of the economy.
So, Senate Banking Committee Chairman Christopher Dodd, don't take it away.
In the wake of the biggest financial crisis and most severe economic downturn since the Great Depression, many in Washington have blamed the Fed. Partly to punish it for past failures and partly to help it concentrate on the biggest financial and economic issues, Dodd took away the Fed's regulatory authority over banks in the November draft of his bill to reform the financial industry. Last month, he offered a new draft of his bill, this time giving the Fed authority over the nation's biggest financial firms.
But the Fed is still facing a loss of its oversight powers over nearly 5,000 bank holding companies and nearly 900 banks. ....
In minutes released Tuesday of the Federal Open Market Committee's March 16 meeting, the Fed made clear that supervision does affect monetary policy by including the following language:
Members noted the importance of continued close monitoring of financial markets and institutions -- including asset prices, levels of leverage, and underwriting standards -- to help identify significant financial imbalances at an early stage. At the time of the meeting the information collected in this process, including that by supervisory staff, had not revealed emerging misalignments in financial markets or widespread instances of excessive risktaking. All members agreed that the Committee would continue to monitor the economic outlook and financial developments and would employ its policy tools as necessary to promote economic recovery and price stability.
The key passage is "...including that by supervisory staff..." The Fed here is making the case that it uses information from its supervisors, and that that information helps it shape monetary policy.
A Huffington Post review of previous minutes from FOMC meetings -- the Fed's policy-making body that sets the main interest rate -- shows that the last time the Fed mentioned that it gleaned information from its bank supervisors was during its Nov. 6, 2002, meeting. Since then, while the Fed has discussed bank issues like lending and capital levels, it's never explicitly said that it got that information from its regulators. In fact, bank capital and lending levels are public.
http://www.huffingtonpost.com/2010/04/06/federal-reserve-gets-poli_n_527596.html
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