Richard Fisher says it’s time to reduce the power of Washington and Wall Street.
By James Freeman
Feb. 11, 2015 7:22 a.m. ET
Richard Fisher, President of the Federal Reserve Bank of Dallas, believes “there’s too much power concentrated in the New York Fed.” And that goes as well for the Fed’s Washington headquarters.
He’s calling for voting power at the central bank’s Federal Open Market Committee (FOMC), which sets interest rates, to be reallocated to recognize the rising population and economic power of the South and the West.
In a visit to the Journal this week, Mr. Fisher sketched out his plan to limit the influence of Washington and Wall Street. It’s a parting shot for the inflation hawk who is wrapping up a decade as head of the Dallas Fed. It’s also an effort to head off Congressional efforts that Mr. Fisher believes could threaten the independence of the central bank.
His proposal is bound to make a burgeoning reform debate even more lively, as a Congressional chorus has lately been calling for an audit of the Fed. The institution is already subject to multiple audits and regularly publishes detailed information on its finances as well as minutes of its monetary policy deliberations. But Sen. Rand Paul (R., Ky.) and others are seeking further information on how the Fed manages the nation’s money supply.
Mr. Fisher believes the real aim is to exert political influence over monetary policy. And while he recognizes the constitutional authority of Congress to coin money, he notes the disastrous consequences when monetary policies have been dominated by political considerations, such as the German hyperinflation of the 1920s, and—on a lesser scale—the U.S. inflation plague of the 1970s.
To reform the Fed while maintaining its independence, Mr. Fisher first proposes to end the long tradition of the New York Fed President serving as the vice chairman of the FOMC.
Readers will recall that this job was held by Timothy Geithner during the financial crisis of 2008. Mr. Geithner led the effort to rescue the giant banks that under his oversight had been allowed to accumulate massive mortgage risk. Under the Fisher plan, the vice chairmanship would rotate among all 12 presidents of the regional Fed banks.
“I’m seeking to satisfy the Congress from the standpoint of the fact that New York is viewed very suspiciously. Well, let’s fix that up a little bit. It’s not going to kill the open market committee to have the vice chair rotate,” says Mr. Fisher. He adds that “the whole purpose of the meeting is to instruct the New York desk what to do until you meet next. That’s what you do at the FOMC. So to me there’s a little bit of a conflict of interest there. And even if it’s just perceived as such, let’s correct it.”
Reflecting on the financial crisis, Mr. Fisher says, “I think New York had too much sway during that period.” He notes that former Fed Chairman Ben Bernanke worked to ensure that “all of us were included in all of the discussions when we were actually making policy.” But the outsized power of New York—home to almost all of what he calls “the too-big-to-fails”—has him convinced that reform is in order. He adds that since trading is now electronic, “there is no reason for the trading desk to be in New York. it should be in a low-cost center.”
Mr. Fisher would further boost representation for those outside of Washington and New York.
Today, the Washington-based Fed governors and the Chairman hold a total of seven votes on the FOMC.
That would not change. But whereas today New York gets a permanent seat and the other 11 regional banks take turns sharing four remaining seats, the regional banks would hold six seats under the Fisher plan. New York would lose its permanent seat and instead take its turn in the rotation for one of the six regional seats. So the Fed governors and Chairman, selected by the President and confirmed by the Senate, would still have a majority on the FOMC, but power would be further dispersed outside of the Acela corridor. “The beauty of this proposal, I believe, is that all 50 states are going to be represented, all Congressional districts,” he says.
And to address “the potential for regulatory capture,” Mr. Fisher says that teams in charge of supervision of a “systemically important” bank should come from a district outside where the giant bank is based.
While Mr. Fisher is obviously hoping that his reform plan will catch on, he’s clear that the “last thing I would want to see would be to put 12 Federal Reserve Banks through the [Senate] confirmation process. Then you would really politicize the system.”
Opening up for debate the structure of the Federal Reserve system, where the allocation of power hasn’t changed much since the 1930s, could carry enormous risks. But for lawmakers like Senate Banking Chairman Richard Shelby (R., Ala.) and House Financial Services Chairman Jeb Hensarling (R., Texas), shifting power to the south and west might be more appealing than inviting Congress into interest-rate decisions.
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