February 11, 2016

Shelby Statement at Hearing on the Fed’s Semiannual Monetary Policy Report

WASHINGTON, DC – Thursday, February 11, 2016  – U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, today delivered the following opening remarks during a full committee hearing on “The Semiannual Monetary Policy Report to the Congress.”

Chairman Shelby’s remarks, as prepared, are below.  

“Today we will receive testimony from Federal Reserve Chair Janet Yellen.  The semi-annual Monetary Policy Report to the Congress is an important statutory tool for oversight of the Fed, which was created by Congress over one hundred years ago as part of the Federal Reserve Act.

“The Act grants the Fed a certain degree of independence, but in no way does it preclude Congressional oversight or accountability to the American people.  There is broad consensus that the Fed should communicate in a manner that helps Congress and the public understand its monetary policy decision-making.

“How the Federal Open Market Committee makes its decisions remains a point of contention, however.  Some argue for unfettered discretion, while others advocate a rule-based construct.

“Recently, a statement released by 24 distinguished economists and other officials, including John Taylor, George Shultz, Allan Meltzer and three Nobel Prize winners, disputes the idea that adherence to a clearer, more predictable rule or strategy would reduce Fed independence.

“In fact, their statement argues that ‘…publically reporting a strategy helps prevent policy makers from bending under pressure and sacrificing independence.’

“Last year, this committee favorably reported the Financial Regulatory Improvement Act, which included a provision that would not establish a rule, but rather require the Fed to disclose to Congress any rule it may happen to use in its decision-making process.

“I believe that this represents a reasonable step toward increased transparency and accountability.  It is my hope that this year we will be able to reach bipartisan agreement on this and other reforms.

“Never before has it been more important for Congress to consider ways to strengthen Fed transparency and accountability.  Since the financial crisis, the Fed has expanded its monetary policy actions to an extent that would have been unthinkable a decade ago.

“As former Fed Chairman Paul Volcker described, during the crisis, the Fed took ‘actions that extend the very edge of its lawful and implied powers, transcending certain long-embedded principles and practices.’

“We are all-too-familiar with the successive rounds of quantitative easing that brought the Fed’s balance sheet to over $4 trillion, with no wind-down in sight.

“It begs the question:  How will the Fed shrink a balance sheet that exceeds 20 percent of the entire U.S. economy?

“Some also worry that the Fed may have assumed economic responsibilities beyond its statutory mandates of price stability and full employment.  To the extent that the Fed has done so, it should be disclosed and justified.

“While I agree that the Fed should be free to make independent decisions, it should not be completely shielded from explaining its decisions and the factors it uses to guide them.  At times, it seems that Fed officials resist even sensible reforms designed to improve economic performance, Congressional oversight, or public understanding of the Fed’s actions.

“The need to preserve Fed independence is very real, but surely it does not justify objection to any reform.  Independence and accountability should not be viewed as mutually exclusive concepts. 

“In fact, accountability is even more crucial given the Fed’s role as a financial regulator.  Never before has a single entity held so much power over the direction of our financial system.

“Notably, Dodd-Frank expanded the Fed’s regulatory authority over large sectors of the economy, including insurance companies and other non-bank financial institutions.  Such regulatory authority and the rulemakings issued as a result of it raise significant questions.   

“Recently, the Fed has issued a number of new regulations stemming from the Basel 3 bank capital rules, such as total loss-absorbing capital, the liquidity coverage ratio, and high-quality liquid asset ratings.  These rulemakings are based on the requirements set by the Bank for International Settlements and its Basel Committee on Banking Supervision.

“Instead of allowing international bodies to serve as de facto U.S. regulators, the Fed should appropriately vet these rules and answer important questions. 

“For example, are those international requirements appropriately tailored for our domestic financial institutions? Are they even necessary given existing rules?  Are they harming our economy or placing U.S. firms at a disadvantage? 

“I continue to encourage the Fed to further exercise its regulatory discretion to tailor enhanced prudential standards according to the systemic risk profile of each institution, not arbitrary factors.  And where it does not have the authority to do so, Congress should step in with legislative changes.  None of the Fed’s authorities are immune from reform, and many of us believe that reform is long overdue.

“Chair Yellen, I look forward to your testimony today and your thoughts on these important issues.”