Fed pushes back as Congress eyes its billions
Congress is aiming to take billions out of the Fed's accounts to help pay for a new highway and transit bill.
By Zachary Warmbrodt
Even as members of Congress are slamming the Federal Reserve for being too political with its monetary policy, they are plotting to use the central bank as a government piggy bank.
Congress is aiming to take billions out of the Fed's accounts to help pay for a new highway and transit bill, but the Fed is balking, registering “strong concerns about using the resources of the Federal Reserve to finance fiscal spending.”
But members of Congress who consider the Fed money to be the only politically feasible way to fund a long-term transportation bill are wondering why the central bank didn’t try to stir up opposition sooner. The Fed has clearly been in Congress's cross hairs since at least July.
Congress has until Dec. 4 to vote on a bill, whether it be a long-term deal or another temporary patch. The broad outlines of a deal could be announced as soon as Friday.
"I don't know if it was sticking their head in the sand or if they were feeling like they somehow needed to be neutral on this, but they're certainly not neutral or quiet on a number of other things," said Rep. Bill Huizenga, a Republican from Michigan. "I didn’t quite get it."
There may be no going back. For lawmakers from both parties who have been scouring the budget for offsets, siphoning off money from a Fed backstop account and cutting a dividend the Fed pays to banks are attractive options.
And lawmakers and aides say that the Fed had earlier indicated — behind the scenes — that it preferred a raid of the surplus account to pay for highways over the dividends proposal. Draining the $29 billion account set aside to absorb possible losses is a small cut compared to the Fed's $4 trillion balance sheet.
"For the Federal Reserve to be saying this impinges upon their integrity, etc., etc. — you know, it’s absurd," said Rep. Peter DeFazio, the top Democrat on the House transportation committee. "This is a body that creates money out of nothing."
The Fed’s tactic of quietly objecting appears likely to leave the central bank on the chopping block.
Between mid-July, when it emerged that the Senate was eyeing the Fed for highway funds, and early November, when the House passed its own Fed drawdown, the Fed did little to direct public attention to the issue as it worked in private with Congress. In a statement, a spokesman for the Federal Reserve Board of Governors said board members and staff shared their concerns in "extensive conversations with both members of Congress and congressional staff."
Federal Reserve Chairwoman Janet Yellen first reacted publicly in July as the Senate considered raising billions for roads by cutting the dividends banks earn on capital they pay into the Federal Reserve, which has a system of regional outposts across the country.
During July 16 testimony at the Senate Banking Committee, she said she’d be concerned that reducing the dividend "could have unintended consequences for banks' willingness to be part of the Federal Reserve system."
The Senate passed the bill July 30, over the objections of the Fed and of banks, who were livid about the prospect of losing the payments.
When the House took up the issue, Texas Republican Randy Neugebauer was unhappy that the Senate proposal would penalize banks and also raise some housing fees, so he and his staff dusted off a proposal they’d once developed for another bill that would tap the Fed's capital surplus in a one-time withdrawal to satisfy House spending rules.
Because of the "goofy budgetary process" in the House, he said, he had to make it a permanent liquidation of the Fed's surplus funds.
The capital surplus account goes back to the beginning of the Federal Reserve, which was up and running beginning in 1914. According to a 2002 study by what was then called the General Accounting Office, the Federal Reserve's regional banks drew on their capital surplus at least 158 times to absorb weekly losses from 1989 to 2001.
At the staff level, the Fed “knew we were talking about it," Neugebauer said. "Subsequent to that, I had conversations with [officials] higher level than staff about that. Obviously, they feel like a lot of people do, including me, that we ought to be looking for transportation funding within transportation and not outside. But I felt like this was the least impact on the system."
Yellen appeared before the House Financial Services Committee Nov. 4 to talk about banking regulation. She said nothing about the highway bill and no one asked her about it. The fact that the hearing ended without anyone addressing a big elephant in the room raised eyebrows on both sides of the aisle.
Huizenga, who authored the Fed surplus cut with Neugebauer, said fed officias " sent signals that they would rather not be asked about it.”
Huizenga’s spokesman added that it “was a situation where there was great concern from [Financial Services Committee] Republicans that if we brought the subject up it would tip our hand and jeopardize the amendment to the highway bill."
In a speech delivered that evening, Federal Reserve Vice Chairman Stanley Fischer gave the Fed's clearest public critique of the highway bill offsets without naming the bill, the dividend or Neugebauer's proposal to tap the surplus fund.
Deep into a broader speech about central bank independence, Fischer noted that "recently some have proposed that the Fed be used to provide revenue to fund specific government initiatives." He said, it amounted to "quasi-fiscal policy, with manifold implications for central bank independence as well as for the quality of fiscal policy decisions."
One House aide close to the issue, sympathetic to the fact that the Fed had two bad options between the dividend cut and the surplus fund reduction, said Fischer's comment was ambiguous and that opponents of the Fed's treatment in the highway bill would have liked more cover from the Fed.
The day after Yellen and Fischer spoke, the House voted 354-72 to approve Neugebauer and Huizenga's amendment and passed its version of the highway bill.
"That was 354 votes against the Senate proposal," Neugebauer said, "more than it was an embrace of the alternative pay-for."
Looking back, Neugebauer, who is now on the conference committee trying to hash out a compromise, said the Fed has probably been more focused on how it sets monetary policy than how it's going to provide funding for the transportation bill.
"Sometimes people just sit there watching and say surely that’s not going to happen, and then it happens," Neugebauer said.
In the days after the House vote, the Fed’s surrogates argued its case.
The Washington Post editorial board scolded Congress and wrote that, "Many a banana republic ... has come to grief using its central bank to facilitate government deficit spending."
Former Federal Reserve Chairman Ben Bernanke, now with the Brookings Institution, said in a blog post that, while the Fed can operate with little or no capital, it's "not good optics or good precedent" to raid an independent central bank. Bernanke said the highway bill manuever was "budgetary sleight-of-hand."
Despite the public support, it's likely too late for the Fed to stop a moving train.
"I’m a little confused why the Fed wasn’t more vocal about that initially," Huizenga said. "Because by choosing to not be vocal initially on that, I think that sort of absence of objection became a tacit approval in many people’s minds, rightly or wrongly."
Heather Caygle and Lauren Gardner contributed to this report.
Read more: http://www.politico.com/story/2015/11/federal-reserve-congress-pushback-216086#ixzz3s5ZC2RYw