Systemic Power May Cost Fed Freedom

By Steven Sloan


Though the Federal Reserve Board is on the cusp of gaining what every agency craves — more power — it could lose the one characteristic that has made it such a substantial force over the decades: political independence. The financial crisis has laid bare the need for tougher regulation of firms such as American International Group Inc. and Bear Stearns Cos., whose collapse would be catastrophic for the broader economy. Prominent figures in Congress, including House Financial Services Committee Chairman Barney Frank, say the Fed should fill that role. But in exchange for more authority over the most systemically important institutions, observers say, the Fed could find itself subject to politics like never before. Increased scrutiny of the Fed’s regulatory actions could threaten its ability to conduct monetary policy, which, observers said, is premised on independence from political forces. Still, the debate continues over whether Congress should let the central bank continue supervising the industry at all. “The Fed always defended its role as the bank holding company regulator on the grounds that it needed that role to inform monetary policy,” said Karen Shaw Petrou, the managing director of Federal Financial Analytics Inc. “The new focus on systemic risk to save the world is very different. Instead of saying we need to know what the big banks are doing to guide monetary policy and set the fed funds rate, this would put institutions into resolution.”