GOP and Dem lawmakers aim to assert greater control over the Federal Reserve

The Federal Reserve’s relationship with Congress is growing more complicated as lawmakers second-guess its decisions and look to impose reforms.

On Monday, the Fed will again face congressional scrutiny, as Rep. Kevin Brady (R-Texas) unveils a sweeping bill aimed at limiting what actions the Fed can take. The legislation from Brady, the vice chairman of the Joint Economic Committee who also holds a top spot on the Ways and Means Committee, is the latest in a series of bills in the 112th Congress aimed at reworking the central bank.

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While libertarian firebrand Rep. Ron Paul (R-Texas) is most associated with Fed scrutiny, members of both parties have begun to second-guess how the Fed conducts its business. On the left, Sen. Bernie Sanders (I-Vt.) has emerged as a vociferous critic.

“It’s a funny development,” said Barry Bosworth, an economist with the Brookings Institution. “Historically, I would not have thought that there was a lot of antagonism between the Congress and the Federal Reserve.”

A major reason for the heightened scrutiny is the financial crisis, experts say. When the Fed stepped in and took unprecedented steps to keep the financial system afloat, the breadth of its power seems to have caught lawmakers off guard.

“There’s a sense in which the actions the Fed took during the crisis surprised people,” said Phillip Swagel, a former Treasury Department official under President George W. Bush who also spent time at the Fed as an economist. “I think members didn’t quite understand the discretion that the Fed has.”

Now, lawmakers are looking to exert a bit more control over the institution that pulls key levers of the nation’s economy.

The headline provision of Brady’s bill is one that has been pushed by Republicans in the past: refining the Fed’s mission so it is solely focused on preventing inflation, as opposed to the dual goals of price stability and maximum employment.

GOP lawmakers have been withering in their criticism of recent Fed decisions. They argue the sweeping policies the central bank has adopted to spur the economy are doing more harm than good, sowing the seeds of potentially damaging inflation.

Brady’s bill would also revamp who makes decisions at the Fed. Currently, key policy decisions come from the voting members of the Federal Open Market Committee (FOMC), which consists of seven Fed governors nominated by the president, the president of the New York Fed, and a rotating contingent of four regional Fed governors. Under the bill, all 11 regional presidents would get a vote on the FOMC, which Brady maintains would diversify views and pull power away from the New York-Washington bloc.

Brady is not the only lawmaker eyeing the makeup of the FOMC. Rep. Barney Frank (D-Mass.), the ranking member of the House Financial Services Committee, is looking to pull the Fed in exactly the opposite direction. 

Frank introduced a bill last year that would remove the five Fed presidents from the FOMC, and instead replace them with more presidential nominees, arguing that the current structure hands too much power to those who have not been vetted by policymakers.

The lack of consensus on a way forward for the Fed makes the odds of any reforms from the divided Congress a long shot. But it does appear that heightened congressional scrutiny is having an effect.

In recent months, the central bank has made a concerted effort to become more transparent. The Fed now is telling the markets when it plans to lift interest rates from their near-zero levels — the end of 2014 — and it recently made public its 2 percent target for inflation. Furthermore, Fed Chairman Ben Bernanke in the last year has begun hosting press conferences following certain Fed decisions where he lays out the bank’s rationale, in addition to fielding questions on a range of other issues.

Swagel says it is not a coincidence that these moves have come on the heels of criticism from the right and the left that the Fed is too opaque.

“The efforts by the Fed to increase transparency, I think, are a response to that, to say to people on both sides, ‘We are doing what we’ve been told to do,’” he said.

Even with lawmakers criticizing the Fed and thinking of overhauling it, Fed officials have taken pains to avoid picking a fight with lawmakers over its mission. In his testimony before Congress, Bernanke is always quick to point out that the Fed’s mandate exists thanks to Congress.

“The Federal Reserve and people involved with it are very aware of the fact that the Federal Reserve is a creation of the Congress,” said Bosworth. “They do not want battles with politicians.”