Federal Reserve Under Congressional Scrutiny

By Silla Brush
Congressional oversight of the Federal Reserve is likely to ramp up sharply after a series of unprecedented steps by the central bank that has expanded its role into nearly every corner of the financial system.

House Financial Services Committee Chairman Barney Frank (D-Mass.) said he is planning hearings on the Fed in February and is seeking answers from Federal Reserve Chairman Ben Bernanke about the bank’s actions to halt the nation’s financial crisis.

“In February, I’m going to begin the process in our committee of oversight on how this is done,” said Frank, who has enjoyed a good working relationship with the Fed chairman. “I told Bernanke he’s got to come up and explain it.”
Frank’s comments are some of the first strong indications that lawmakers on Capitol Hill are interested in flexing their muscles to seek answers about the central bank’s role in the financial crisis.

Most lawmakers have remained focused on the Treasury Department’s efforts and the highly controversial $700 billion financial rescue package that lawmakers passed in October. The Bush administration’s use of the funds has been criticized heavily by lawmakers from both parties, and the House on Thursday is scheduled to consider a resolution attaching strict conditions to the release of the second half of those funds.

The Fed’s role in the crisis has come under decidedly less criticism, even though it has spent or committed more money than the Treasury. In total, the Fed has lent or guaranteed trillions of dollars in its effort to stabilize the financial system.

Close watchers of the Fed say it is unsurprising that lawmakers are beginning to press for more oversight. Vincent Reinhart, a former Fed official and fellow at the American Enterprise Institute, said that when you have a $2 trillion-to-$3 trillion balance sheet, “you’ve just put a bull’s-eye on the front door of your building.”

The bank took an unprecedented step in December when it lowered the interest rate to nearly zero percent — a range of zero to 0.5 percent. Throughout the year, but particularly since the fall, the bank has also taken dramatic steps to nearly double the balance sheet to $2.3 trillion to ease the credit crisis through a series of acronym-laden facilities housed at the central bank. The bank has also committed trillions of dollars more.

The law governing the Federal Reserve’s recent actions was passed during the Great Depression. Says Frank, “It’s been pretty dormant until recently.

“It has obviously gotten very big and needs to be addressed,” Frank said, referring to the balance sheet and the various special institutions set up at the Fed.

The central bank’s role in setting economic policy will also come in for congressional review as lawmakers begin to craft an overhaul of the financial regulatory system. One major question up for discussion is whether the central bank should gain additional regulatory oversight roles. This could involve giving the Fed greater responsibility as a broad “systemic regulator.”