Bailout

The FOMC?s minutes get political

By Felix Salmon

Shahien Nasiripour finds a nugget in the latest FOMC minutes: for the first time since 2002, they mention the Fed’s “supervisory staff” as part of the way that the Fed conducts monetary policy. The idea is that bank supervisors help to keep an eye on leverage and other risks in the financial sector, and that the FOMC uses that information when setting interest rates.

Shahien talks to former Fed governor Laurence Meyer, who reads this as a protective move by the Fed: the regional Fed banks, in particular, would have a much harder time justifying their existence as large institutions if they lost their supervisory role. And Meyer is surely right. Yes, information from bank supervisors can be used in FOMC meetings — but the Fed could have people supervising any sector of the economy and then use that information in its meetings. The point of supervising banks is to supervise banks, not to set monetary policy.

The Fed argues that bank supervisors can and should be used to help rein in banks during bubbles, thereby allowing their Fed funds lever to be used not for bubble-pricking but rather for its main purpose of keeping inflation low and employment high. This argument would carry a lot more weight if the Fed’s supervisors had ever actually done anything like that, or if they could credibly say that bank supervisors would be happy instructing banks to dial back their risk just because the economy was looking particularly healthy.

So consider this to be just another shot fired in the regulatory turf war — and quite a quiet and subtle one, at that. The question is whether FOMC minutes are really the right place from which to fire such shots.

Full post as published by Macroprudential on April 07, 2010 (boomark / email).