As FedFin forecast, the FRB faces a very hot autumn when Congress comes back after Labor Day. We have recently completed our assessment of Senate legislation to fund transportation infrastructure with FRB dividends pilfered from the biggest banks. We conclude that this has little direct impact on the FRB, at least at the outset, but it will cost banks a bit and lay pipe for broader inroads into the FRB’s balance sheet for political purposes as the U.S. fiscal-policy dilemma grows ever more dire in September.
This, though, is only a foretaste of the really serious challenge facing not just the FRB, but also the financial system in the fall. Little noticed in the legislative rush is language approved by the House Financial Services Committee to sharply curtail the ability of the Federal Reserve to provide emergency liquidity in market crises. One might discount this given Democratic opposition to much of the GOP House’s legislation, but very similar legislation has been introduced in the Senate by Elizabeth Warren (D-MA) and David Vitter (R-LA). The FRB is trying to waylay these bills with a rule on its 13(3) powers this fall, but we suspect it will only make Congress angry and spur legislative action.
As this advances, especially in the midst of a fiscal-policy meltdown, jittery markets will be even more spooked about the ability of the FRB to execute its QE3 exit and its simultaneous capacity to step in if flash crashes fire up. We have recently concluded in-depth analyses on all of these issues and would be happy to answer any questions you may have by sending us an email to firstname.lastname@example.org .