Rep. Barney Frank (D-MA), ranking member on the House Financial Services Committee, must not be pleased that the Federal Reserve plans to end its monetary stimulus next month. He introduced a bill (.pdf) this week that would kick regional Federal Reserve Bank presidents off the Federal Open Market Committee, the group that sets U.S. monetary policy. Instead, just Federal Reserve Governors, appointed by the President and confirmed by Congress, would be left to set monetary policy. This is an awful idea.
First, a brief explanation of the FOMC's structure might help. Currently, there are 12 members. Seven are governors, appointed by the President and confirmed the Senate. Five are regional Fed presidents. The New York president has a permanent seat and the other four rotate between the other 11 regional presidents.
Here's why Frank likes the idea, via Greg Robb at MarketWatch:
Their presence as voting members "it totally inconsistent with any kind of theory of democracy," Frank said.
"It undermines legitimacy when you have literally people who are in the financial industry picking people to vote on setting interest rates," Frank said.
However, Frank's motivation to kick the regional presidents off the FOMC could be political. Some of them tend to be hawkish on inflation, which means they are less likely to support very aggressive monetary stimulus. For example, Kansas City Fed President Thomas Hoenig became infamous for his regular dissenting votes last year when he sat on the FOMC. Although no regional presidents have dissented in 2011, a few -- especially Philadelphia Fed President Charles I. Plosser -- may object if others on the FOMC vote for another round of monetary stimulus.