So You Still Think The Fed Doesn't Need Oversight?

After this latest episode involving the disgraced Federal Reserve Bank of Richmond President Jeffrey Lacker, who resigned for being less than truthful in the Fed’s probe of a leak to an analyst five years ago, are there still some people – outside the Fed, that is – who still believe the central bank is above the law and shouldn’t have to answer to Congress?

If you haven’t heard by now, Lacker – who was slated to resign later this year anyway – suddenly stepped down as the head of the Richmond Fed after he admitted to speaking to an analyst at Medley Global Advisors in 2012 the day before it published a report that contained confidential information about Fed policy discussions. You might remember that the leak, when it first came to light several years ago, “sparked a criminal investigation, prompted outrage on Capitol Hill and deeply embarrassed the Fed,” as the Wall Street Journal reported.

According to the Journal’s account of what happened, Lacker was interviewed by the Fed’s general counsel as part of its internal probe into the leak but failed to mention his phone call with the Medley analyst. Not surprisingly, the Fed’s investigation concluded without finding anything wrong.

In 2015, however, federal prosecutors in New York, the Commodity Futures Trading Commission and the Fed’s inspector general’s office launched their own investigation, at which time Lacker apparently did remember that call. He was reappointed to a new five-year term the following February.

Lacker was also less than straightforward even in his resignation announcement. According to his statement, it was his decision alone to step down. But the Richmond Fed suggested otherwise. “Once our bank’s Board of Directors learned of the outcome of the government investigations, they took appropriate actions,” the bank said.

Fortunately, according to press reports, the Lacker episode does appear to be without precedent, at least at that high of a level. If nothing else, though, the Lacker episode does show that the Fed is not competent to conduct its own investigations into its own affairs. It believes itself to be above the law, and its senior employees seem to behave accordingly. Why else would Lacker fail to answer the Fed’s general counsel’s questions truthfully, then suddenly seemed to remember things when the investigation got more serious and involved outside parties?

And why did it take until now for him to resign over this?

Likewise, I’ve also gotten pretty fed up (pun intended) with the central bank’s insistence that politics don’t enter into its decision-making. Its most recent policy actions, I hope, pretty much lays that ridiculous claim to rest.

For eight years under President Obama, as I’ve noted before in this column (I apologize if you’re sick of hearing this), the Fed raised interest rates exactly one time, back in December 2015. Now, since Donald Trump was elected just five months ago, it has already raised rates twice and is now gearing up for more. According to the latest statements from some Fed officials, they just can’t raise rates fast enough.

While the consensus at the Fed seems to call for two more rate increases the rest of this year, some want to move even more aggressively. San Francisco Fed President John Williams, for example, said he still expects just two more rate hikes this year, but added, “given my forecast, along with upside risks, I would not rule out more than three increases total for this year.”

That was echoed by Charles Evans of the Chicago Fed and Boston’s Eric Rosengren, both of whom said they could foresee a total of four rate increases this year, i.e., three more before the end of the year.

At the same time, according to the minutes of its March monetary policy meeting, the Fed wants to start the process of reducing its $4.5 trillion bond portfolio later this year, beginning by not reinvesting the interest payments and letting the securities mature.

Gradually winding down the portfolio, even by simply by letting securities run off as they come due, could put further upward pressure on interest rates at the long end, given the size of the portfolio, just as the Fed is raising rates at the short end.

I’m not questioning the wisdom of doing this – it’s long overdue. But the timing of it all certainly leaves the door wide open to cynicism. Why all of a sudden is there this rush to raise interest rates and unload its securities holdings when the Fed, not exactly known for moving quickly, was more than happy to stand pat just six months ago? Has the economy really improved that much in that time, or is there something else going on here? Would it be moving just as expeditiously under a different president?

The American people, through their duly elected representatives in Congress, have a right to know, plus about a lot of other things going on at the Fed.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.