Federal Reserve: Legislation in the
114th Congress
Marc Labonte
Specialist in Macroeconomic Policy
December 15, 2015
Congressional Research Service
7-5700
www.crs.gov
R44273
Federal Reserve: Legislation in the 114th Congress
Summary
The Federal Reserve (Fed) is the subject of legislation being considered in the 114th Congress.
These bills contain wide-ranging provisions that can be grouped into four broad categories:
Changes to Fed governance. Some proposals would change the Fed’s institutional structure.
H.R. 22 (P.L. 114-94) reduced the dividend paid by the Fed to large commercial banks that hold
stock in the Fed and permanently capped the Fed’s surplus at $10 billion. H.R. 3189 would
permanently eliminate the Fed’s surplus. H.R. 26 (P.L. 114-1) changed and H.R. 3189 would
change the qualifications for selecting individuals to the Fed’s board of governors and regional
bank boards, respectively. H.R. 3189 and S. 1484/S. 1910 would make the Federal Open Market
Committee (FOMC) responsible for setting the interest rate paid on bank reserves and provide
each Fed governor with their own staff. S. 1484/S. 1910 would make the New York Fed President
a presidentially appointed position. H.R. 3189 would change the voting privileges of FOMC
members. S. 1484/S. 1910, H.R. 3189, and H.R. 2912 would create a congressional commission
to recommend reforms.
Changes to oversight and disclosure. Some proposals aim to make the Fed more accountable to
Congress by increasing congressional oversight or requiring the Fed to disclose more information
to Congress and the public. H.R. 3189 would require the Government Accountability Office
(GAO) to audit the Fed annually without statutory restrictions, subject the Fed’s rulemakings to
cost-benefit analysis requirements, create a blackout period surrounding FOMC meetings, and
require the Fed to publicly disclose the salaries of certain officials and employees and more
information on stress tests, supervisory letters, and international negotiations. H.R. 3189 and S.
1484/S. 1910 would require the Fed to report quarterly on monetary policy, require the FOMC to
publicly release transcripts, and require the Chair to testify semiannually on regulation when the
Vice Chair for Supervision position is vacant. S. 1484/S. 1910 would require the Chair to testify
quarterly on monetary policy, allow other members of the FOMC to submit dissenting opinions to
Congress, require the governors to take a recorded vote on larger enforcement actions, and
require the Fed to report on and GAO to conduct a study on the Fed’s regulation of large financial
firms.
Changes involving the Taylor Rule. H.R. 3189 and S. 1484/S. 1910 would require the Fed to
compare its monetary policy decisions to those prescribed by a Taylor Rule and report those
findings to Congress. Policy deviations from the rule would trigger GAO audits and
congressional testimony in H.R. 3189.
Changes to the Fed’s emergency lending powers. H.R. 3189 would reduce the Fed’s discretion
to make emergency loans under Section 13(3) of the Federal Reserve Act. The Fed used this
authority to make loans to non-bank financial firms during the financial crisis.
The various proposals reviewed in this report are wide ranging and diverse; many are united by
the goals of increasing the Fed’s accountability to Congress and decreasing Fed discretion. While
some provisions make very minor changes, taken together the proposals would arguably
somewhat reduce the Fed’s independence from Congress. The Fed is more independent than most
other agencies, which has traditionally been justified by its monetary policy responsibilities. To
some extent, a tradeoff between independence and accountability is unavoidable.
This report analyzes these provisions and the policy debate surrounding them. It covers bills that
have seen committee or floor action.
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Federal Reserve: Legislation in the 114th Congress
Contents
Governance Proposals ..................................................................................................................... 2
Background ............................................................................................................................... 2
Policy Proposals ........................................................................................................................ 3
Oversight/Disclosure Proposals....................................................................................................... 5
Background ............................................................................................................................... 5
Analysis ..................................................................................................................................... 6
Policy Proposals ........................................................................................................................ 6
Taylor Rule ...................................................................................................................................... 8
Background ............................................................................................................................... 8
Analysis ................................................................................................................................... 10
Policy Proposals ....................................................................................................................... 11
Emergency Lending ....................................................................................................................... 12
Background ............................................................................................................................. 12
Analysis ................................................................................................................................... 13
Policy Proposals ...................................................................................................................... 13
Concluding Thoughts .................................................................................................................... 13
Contacts
Author Contact Information .......................................................................................................... 14
Congressional Research Service
Federal Reserve: Legislation in the 114th Congress
he Federal Reserve’s (Fed’s) responsibilities as the nation’s central bank fall into four main
categories: monetary policy, provision of emergency liquidity through the lender of last
T resort function, supervision of certain types of banks and other financial firms for safety
and soundness, and provision of payment system services to financial firms and the government.1
The 114th Congress is considering a number of bills that would affect the Fed’s monetary policy,
lender of last resort, and regulatory responsibilities. The Fed Oversight Reform and
Modernization Act (H.R. 3189) was ordered to be reported by the House Financial Services
Committee on July 29, 2015. H.R. 2912 was added to H.R. 3189 before the latter passed the
House on November 19, 2015.2 The Financial Regulatory Improvement Act (S. 1484) was
reported by the Senate Banking Committee on June 2, 2015. Title 5 includes provisions related to
the Fed. S. 1484 was then included, along with other provisions related to financial regulation, in
the FY2016 Financial Services and General Government Appropriations Act (S. 1910), which
was reported by the Senate Appropriations Committee on July 30, 2015. Provisions that modify
the Fed were also included in the Terrorism Risk Insurance Program Reauthorization Act (H.R.
26/P.L. 114-1), which was signed into law on January 12, 2015, and the Fixing America’s Surface
Transportation Act (H.R. 22/P.L. 114-94), which was signed into law on December 4, 2015.
While these bills contain a number of wide ranging provisions, most provisions can be grouped
into four broad categories:
Changes to Fed governance. Some proposals would change the Fed’s
institutional structure—how officials are selected, how policy decisions are
reached, and so on.
Changes to oversight and disclosure. Some proposals aim to make the Fed
more accountable to Congress by increasing congressional oversight or requiring
the Fed to disclose more information to Congress and the public.
Changes involving the Taylor Rule. Some proposals would require the Fed to
compare its monetary policy decisions to those prescribed by a Taylor Rule
(described below) and report those findings to Congress.
Changes to the Fed’s emergency lending powers. Some proposals would
reduce the Fed’s discretion to make emergency loans under Section 13(3) of the
Federal Reserve Act.
This report analyzes these provisions and the policy debate surrounding them. It covers bills that
have seen committee or floor action.3 It does not cover legislation that would change regulations
administered by the Fed; for more information on those proposals, see CRS Report R44035,
1 For an introduction to the Federal Reserve (Fed), see CRS In Focus IF10054, Introduction to Financial Services: The
Federal Reserve, by Marc Labonte.
2 The White House and Fed released letters opposing H.R. 3189. See Executive Office of the President, Office of
Management and Budget, “Statement of Administration Policy: H.R. 3189—Fed Oversight Reform and Modernization
Act of 2015,” November 17, 2015, at https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/
saphr3189h_20151117.pdf, and Letter from Janet L. Yellen, chair of the Fed, to the Honorable Paul Ryan and the
Honorable Nancy Pelosi, November 16, 2015, at http://www.federalreserve.gov/foia/files/ryan-pelosi-letter-
20151116.pdf, respectively. For an op-ed by Chairman Hensarling supporting the bill, see Jeb Hensarling, “Reining in
a Sprawling Federal Reserve,” Wall Street Journal, November 19, 2015, at http://www.wsj.com/articles/reining-in-a-
sprawling-federal-reserve-1447978230?alg=y.
3 All discussions of provisions of the bills in this report are based on the latest version to see congressional action,
unless otherwise noted.
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“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress, coordinated by
Sean M. Hoskins.
Governance Proposals
Background
The Federal Reserve Act (12 U.S.C. §221 et seq.) created the Fed as the nation’s central bank in
1913. The basic governance structure is largely unchanged in recent decades. The Fed is
composed of 12 regional Federal Reserve banks overseen by a Board of Governors in
Washington, DC. The board is composed of seven governors nominated by the President and
confirmed by the Senate. The President selects (and the Senate confirms) a chair and two vice
chairs from among the governors. The governors serve nonrenewable 14-year terms, but the chair
and vice chairs serve renewable 4-year terms. Board members are chosen without regard to
political affiliation.
Generally, policy is formulated by the board and carried out by the regional banks. Monetary
policy decisions, however, are made by the Federal Open Market Committee (FOMC), which is
composed of the seven governors, the president of the New York Fed, and four other regional
bank presidents. Representation for these four seats rotates among the other 11 regional banks.
The FOMC meets at least every six weeks to set monetary policy.
Aside from its permanent seat on the FOMC, the New York Fed has no special role in the Federal
Reserve Act compared to other Fed regional banks. Nevertheless, it has taken on certain
prominent roles within the system. It carries out the open market operations that implement the
FOMC’s monetary policy decisions. During the financial crisis, many of the Fed’s emergency
programs (discussed in the section below entitled “Emergency Lending”) were run by the New
York Fed. It supervises many of the largest banks because they are headquartered in the New
York Fed’s District. The New York Fed is responsible for conducting foreign exchange
transactions on behalf of the government, and storing the gold of foreign central banks and
international agencies. In all of these instances, it is executing, not formulating, policy. By
tradition, the FOMC elects the New York Fed president to be its Vice Chair, a position with no
formal powers.
The Fed’s capital is comprised of paid-in capital issued to member banks and retained earnings
deposited in its surplus account. Private banks regulated by the Fed buy stock in the Fed to
become member banks. Membership is mandatory for national banks, but optional for state
banks. To finance the creation of the Fed, the Federal Reserve Act required member banks to
purchase stock issued by the Fed. Member banks are required to purchase (“pay in”) stock equal
to 3% of their capital, and the Fed has the option to call in an additional 3%. The stock can be
thought of as a risk-free investment; it pays dividends, which was fixed by statute at 6% from
1913, until modified in 2015 (as discussed in the next section). Ownership of stock in the Fed
confers more limited rights than common stock in a private corporation. For example,
stockholders have no control over Fed policy.
Stockholders choose two-thirds of the board of directors at the regional Fed banks, however. Each
regional Fed bank has a board that is composed of three Class A directors, required to be
representatives of the banking industry chosen by member banks; three Class B directors,
representatives of the public chosen by member banks; and three Class C directors,
representatives of the public chosen by the Board of Governors. A chairman and deputy chairman
of the board are selected from among the Class C directors. The other main difference between
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the classes of directors is their role in choosing the regional bank presidents. Regional bank
presidents are chosen by the Class B and C directors of their boards, not by the President, with the
approval of the Board of Governors.
The Fed’s budget is not subject to congressional appropriations. The Fed is self-funded by fees
and the income generated by securities it owns. Its income exceeds its expenses, and it remits
most of its net income to the Treasury, where it is used to reduce the federal debt. The Fed uses a
small portion of its net income to pay dividends to member banks and to add to its surplus.
Policy Proposals
Voting on the FOMC/Blackout Period. H.R. 3189, among other things, would change the
voting membership of the FOMC to increase the number of regional bank presidents from five to
six and allow them each to vote every other year.4 To accomplish this, it would reduce the
frequency of the New York Fed’s voting rights on the FOMC from every year to every other year
and increase the frequency of voting rights for 9 of the other 11 banks from every third year to
every other year.5 It would also mandate a media blackout period lasting from one week before to
one day after a meeting of the FOMC, where monetary policy decisions are made.6
Selection of New York Fed President. S. 1484/S. 1910 would require the President of the New
York Fed to be appointed by the President and confirmed by the Senate. Currently, all of the
regional bank presidents are selected by certain members of the regional banks’ boards, subject to
the approval of the Board of Governors. The New York Fed President would be required to testify
annually before the committees of jurisdiction.7
Interest Paid on Reserves. H.R. 3189 and S. 1484/S. 1910 would shift responsibility for setting
the interest rate paid to banks on reserves from the Board of Governors to the FOMC. The Fed
uses this interest rate to help it achieve its federal funds rate target, which is set by the FOMC, in
the presence of the Fed’s large balance sheet.8
Staff for Board Members. Currently, the Board’s professional staff are shared by the Board
members. H.R. 3189 would allow each board member to hire at least two personal staff. S.
1484/S. 1910 would allow each board member to hire no more than four personal staff.
Congressional Commission. H.R. 2912 was ordered to be reported by the House Financial
Services Committee on July 29, 2015. It then was included in the version of H.R. 3189 that
passed the House. It would create a commission whose voting members are composed of four
Members of the House from the majority party, two Members of the House from the minority
party, four Members of the Senate from the majority party, and two Members of the Senate from
the minority party. The commission would examine and make recommendations on monetary
4 Although the Fed Board members would still have more seats on the FOMC than the Fed presidents, because there
are frequently vacancies on the Board, this change would make it more likely that the presidents would outnumber
Board members on the FOMC at any given time.
5 Under current law, the Federal Reserve Banks of Chicago and Cleveland presidents already vote on the FOMC every
other year.
6 The Fed has voluntarily adopted a similar policy. See http://www.federalreserve.gov/monetarypolicy/files/
FOMC_ExtCommunicationStaff.pdf.
7 See the section below entitled “Oversight/Disclosure Proposals” for information on current requirements for Fed
officials to testify.
8 For more information, see CRS Insight IN10170, How Will the Federal Reserve “Normalize” Monetary Policy After
QE?, by Marc Labonte.
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policy, the dual mandate,9 macroprudential regulation, and lender of last resort functions. The
commission is authorized to be funded through appropriations.
S. 1484/S. 1910 would create a commission composed of two Members of the House selected by
the Speaker and one Member appointed by the Minority Leader, two Members of the Senate
selected by the Majority Leader and one selected by the Minority Leader, and one member
selected by the President. The commission would be tasked with studying and recommending
whether the 12 Federal Reserve districts should be restructured. The commission is to be funded
out of the earnings of the Fed.
Reduction in Dividend to Member Banks. H.R. 22 (P.L. 114-94), which was signed into law on
December 4, 2015, reduced the dividend that the Fed pays on stock held by member banks with
more than $10 billion in assets from 6% to the lower of 6% or the most recent yield on 10-year
Treasury securities.10 (For banks with less than $10 billion in assets, the dividend continues to be
6%.) The market yield on 10-year Treasury securities has been below 6% since 2000, and the
Congressional Budget Office (CBO) projects it will remain below 6% over the next 10 years.11
Because the Fed’s profits are used to pay both dividends to member banks and remittances to
Treasury, a reduction in dividends would presumably increase remittances. Thus, the provision
was included in “Title XXXII-Offsets” of the act and CBO estimated that this provision will raise
revenues by $6.9 billion over 10 years.12 Based on Fed data, 47 national banks and 21 state
member banks have more than $10 billion in assets as of June 30, 2015.13
Elimination of Fed Surplus. “Title XXXII-Offsets” of H.R. 22 (P.L. 114-94) included a
provision that capped the Fed’s surplus (comprised of retained earnings) at $10 billion and
required funds in excess of that amount to be remitted to Treasury, where they become general
revenues. At the time of enactment, the Fed’s surplus was equal to $29.4 billion. CBO estimated
that this provision will increase revenues by $53.3 billion over 10 years.14 CBO assumed that the
Fed will finance the transfer by selling Treasury securities, which otherwise would have earned
income that would have been remitted to the Treasury in future years. Thus, the provision can be
thought of as shifting Fed remittances from the future to the present. H.R. 3189, as passed by the
House, would permanently eliminate the Fed’s surplus and transfer its balance to the Treasury.
Qualifications for Fed Leadership Positions. H.R. 26 (P.L. 114-1) required the President to
“appoint at least one member with demonstrated primary experience working in or supervising
community banks having less than $10,000,000,000 in total assets” to the Board of Governors. As
a result, community banks are the only interest group specifically required to be nominated as a
member of the Board. Previously, in making nominations, the President was only required to give
“due regard to a fair representation of the financial, agricultural, industrial, and commercial
interests, and geographical divisions of the country.”15
9 12 U.S.C. §225a.
10 The $10 billion threshold is indexed to increase annually by the growth in gross domestic product.
11 For historical data, Federal Reserve, Selected Interest Rates, data release H.15; for projections, Congressional Budget
Office, An Update to the Budget and Economic Outlook, August 2015, Table B-2.
12 Congressional Budget Office, Letter to Honorable Bill Shuster, December 2, 2015, https://www.cbo.gov/sites/
default/files/114th-congress-2015-2016/costestimate/hr22_1.pdf.
13 Federal Reserve, Large Commercial Banks, data release.
14 Congressional Budget Office, Letter to Honorable Bill Shuster, December 2, 2015, https://www.cbo.gov/sites/
default/files/114th-congress-2015-2016/costestimate/hr22_1.pdf.
15 12 U.S.C. §241.
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Currently, Class B and C directors of the Fed’s regional bank boards are “elected without
discrimination on the basis of race, creed, color, sex, or national origin, and with due but not
exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and
consumers.” H.R. 3189, as passed by the House, would add “traditionally underserved
communities and populations” to the list of considerations.
Oversight/Disclosure Proposals
Background
Critics of the Federal Reserve have long argued for more congressional oversight, Fed
transparency, and Fed disclosure. Criticism intensified following the extensive assistance
provided by the Fed during the financial crisis.
Some critics have downplayed the degree of oversight and disclosure that already takes place. For
congressional oversight, the Fed has been required by statute to report to and testify before the
House and Senate committees of jurisdiction semiannually since 1978. At these hearings, which
take place in February and July, the Fed chairman presents the Fed’s Monetary Policy Report to
the Congress, testifies, and responds to questions from committee members.16 In addition, these
committees periodically hold more focused hearings on Fed topics. On January 25, 2012, the Fed
began publishing forecasts for its federal funds rate target and announced a longer-run goal of 2%
for inflation. According to the Fed, it hopes greater transparency about its intentions will
strengthen financial market participants’ understanding of its actions, thereby making those
actions more effective.17
Contrary to popular belief, the Government Accountability Office (GAO) has conducted audits of
the Fed’s regulatory and payment activities regularly since 1978, subject to statutory restrictions.
In addition, private-sector auditors audit the Fed’s financial statements and the Fed has an Office
of Inspector General. The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L.
111-203) required an audit of the Fed’s emergency activities during the financial crisis, released
in July 2011, and an audit of Fed governance, released in October 2011. The effective result of the
audit restrictions remaining in law is that GAO can audit the Fed’s monetary policy decisions or
operations, transactions with foreign central banks and governments, discount window
operations, or policies related to bank reserves or securities credit for waste, fraud, and abuse, but
cannot evaluate the economic merits of these actions.18
For Fed disclosure, the Fed has publicly released extensive information on its operations, mostly
on a voluntary basis. It is statutorily required to release an annual report and a weekly summary
of its balance sheet. The expanded scope of its lending activities during the financial crisis
eventually led it to release a monthly report that offered more detailed information. In December
2010, the Fed released individual lending records for emergency facilities, revealing borrowers’
identities and loans’ terms, as required by the Dodd-Frank Act. Going forward, individual records
16 These hearings and reporting requirements were established by the Full Employment Act of 1978 (P.L. 95-523, 92
Stat 1897), also known as the Humphrey-Hawkins Act, and renewed in the American Homeownership and Economic
Opportunity Act of 2000 (P.L. 106-569).
17 Ben Bernanke, “Communication and Monetary Policy,” Speech at the National Economists Club, Washington, D.C.,
November 19, 2013, http://www.federalreserve.gov/newsevents/speech/bernanke20131119a.htm.
18 31 U.S.C. §714.
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for discount window and open market operation transactions have been released with a two-year
lag.
More recently, some Members of Congress have sought greater disclosure of information related
to regulation (including international agreements), and salary and financial information about Fed
officials and employees. In its rule-making, the Fed follows the standard notice and public
comment process, but is not required to conduct cost-benefit analysis. The Fed has an
ombudsman and an appeals process for its supervisory decisions, such as exam results. The
Dodd-Frank Act created a Vice Chair for Supervision who is required to testify before the
committees of jurisdiction semiannually; that position has not yet been filled, however.
For more information, see CRS Report R42079, Federal Reserve: Oversight and Disclosure
Issues, by Marc Labonte.
Analysis
Although oversight and disclosure are often lumped together, they are separate issues and need
not go together. Oversight relies on independent evaluation of the Fed; disclosure is an issue of
what internal information the Fed releases to the public. Contrary to a common misperception, a
GAO audit would not, under current law, result in the release of any confidential information
identifying institutions that have borrowed from the Fed or the details of other transactions.
A potential consequence of greater oversight is that it could undermine the Fed’s political
independence. Most economists believe that the Fed’s political independence leads to better
policy outcomes and makes policy more effective by enhancing the Fed’s credibility in the eyes
of market participants. The Fed has opposed legislation removing remaining GAO audit
restrictions on those grounds. Disclosure helps Congress and the public better understand the
Fed’s actions. Up to a point, this makes monetary and regulatory policy more effective, but too
much disclosure could make both less effective because they rely on market-sensitive and
confidential information. The challenge for Congress is to strike the right balance between a
desire for the Fed to be responsive to Congress and for the Fed’s decisions to be immune from
political calculations and pressure.
Policy Proposals
GAO Audit. H.R. 3189, as passed by the House, would remove statutory restrictions on GAO
audits of monetary policy and would require an annual audit that is not subject to current statutory
provisions, such as confidentiality requirements. Effectively, this would expand GAO’s powers to
allow it to evaluate the economic merits of Fed policy decisions. In the past two Congresses, the
House passed bills similar to this provision.19
GAO Studies/Fed Reports on Large Financial Institutions. S. 1484/S. 1910 would require a
one-time GAO study and a report by the Fed to Congress every 2 years for the next 10 years on
the Fed’s enhanced prudential regulation of banks with more than $50 billion in assets and
nonbank financial institutions designated as systemically important (SIFIs).20 Among other
19 For more information, see CRS Report R42079, Federal Reserve: Oversight and Disclosure Issues, by Marc
Labonte.
20 For more information on enhanced prudential regulation, see CRS Report R42150, Systemically Important or “Too
Big to Fail” Financial Institutions, by Marc Labonte.
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things, the bill requires the GAO study to evaluate whether there are conflicts of interest between
the Fed and the large institutions it regulates.
Testimony and Report to Congress on Monetary Policy. S. 1484/S. 1910 and H.R. 3189 would
increase the frequency of the Fed’s required reports to Congress on monetary policy from
semiannually to quarterly. H.R. 3189 would also require the Chair to testify on monetary policy
quarterly instead of semiannually before the committees of jurisdiction. S. 1484/S. 1910 would
also change the required contents of the report to Congress. It adds three economic variables—
inflation expectations, credit conditions, and interest rates—to the list of items that the Fed should
discuss in the report. It would also require the report to include economic and monetary policy
projections and information related to the Taylor rule (discussed in the next section entitled
“Taylor Rule”). It would allow any member of the FOMC to include a statement of dissent in the
report to Congress.
Vice Chair of Supervision. The Dodd-Frank Act created the position of Vice Chair of
Supervision on the Board of Governors and required the Vice Chair to testify on Fed supervision
semiannually. H.R. 3189 would change the frequency of testimony to quarterly and would require
a written report on ongoing rule-making to accompany that testimony. The position, which is
subject to presidential nomination and Senate confirmation, has been vacant since it was created
in 2010, so no testimony has taken place to date.21 S. 1484/S. 1910 and H.R. 3189 would require
the Fed Chair to testify when the position of Vice Chair is vacant.
Release of FOMC Transcripts. Currently, the Fed voluntarily releases FOMC transcripts to the
public with a five-year lag. S. 1484/S. 1910 would require the lagged release of FOMC transcripts
after three years. H.R. 3189, as passed by the House, would require the transcripts to be publicly
available.
Enforcement Actions. S. 1484/S. 1910 would require a publicly recorded vote by the Board on
bank enforcement actions exceeding $1 million.22
Disclosure of Supervisory Information. H.R. 3189 would require the Fed to determine its stress
test scenarios through the public rule-making process and provide those scenarios to GAO and
CBO’s Panel of Economic Advisers. Currently, the scenarios are not disclosed to the banks or the
public, but the stress test process was publicly described through the standard rule-making
process. It would require the Fed to publicly disclose the total number of supervisory letters sent
to bank holding companies with more than $50 billion in assets or non-banks designated as
systemically important.
Cost-Benefit Analysis Requirements. H.R. 3189 would require the Fed’s public rule-making to
include quantitative and qualitative cost-benefit analysis and a post-adoption impact assessment.
Disclosure of International Negotiations. H.R. 3189 would require the Fed to notify the
committees of jurisdiction and the public and solicit public comment at least 30 days before it
enters into and at least 90 days before it completes international negotiations on financial
standards.23
21 On November 4, 2015, Chair Yellen testified before the House Financial Services Committee in lieu of the Vice
Chair.
22 For information on enforcement actions, see http://www.federalreserve.gov/apps/enforcementactions/default.aspx.
23 This section also applies to the Federal Deposit Insurance Corporation and the Office of the Comptroller of the
Currency.
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Disclosure of Salaries and Financial Information. H.R. 3189 would require the public
disclosure of salary and personal finances for all Fed governors, officers, and employees of the
Federal Reserve Board of Governors with a salary above the equivalent of GS-15 on the
government scale.
Impact of Export Credit on the Industrial Production Index. H.R. 3189, as passed by the
House, would require the Fed to include an estimate of the impact of the Export-Import Bank and
foreign export credit agencies on the Industrial Production Index in that release, which is
prepared monthly by the Fed.
Taylor Rule
Background
Currently, Congress has granted the Fed broad discretion to conduct monetary policy as it sees fit
as long as it strives to meet its statutory mandate. This discretion includes autonomy over what
policy tools to use (e.g., whether policy should be carried out by targeting the federal funds rate)
and what the stance of monetary policy should be (e.g., at what level should the federal funds rate
target be set?).
Some Members of Congress, dissatisfied with the Fed’s conduct of monetary policy, have looked
for alternatives to the current regime. Some opponents of Fed discretion argue for a rules-based
regime. One example of a monetary policy rule is the Taylor rule, which was developed by
economist John Taylor to describe and evaluate the Fed’s interest rate decisions.24
Normally, the Fed carries out monetary policy primarily by setting a target for the federal funds
rate, the overnight inter-bank lending rate.25 The Taylor rule is a simple mathematical formula
that, in the best-known version (described in the text box below), relates interest rate changes to
changes in the inflation rate and the output gap. These two factors directly relate to the Fed’s
statutory mandate to achieve “maximum employment and stable prices.”
24 John Taylor, “Discretion vs. Policy Rules in Practice,” Carnegie-Rochester Conference Series on Public Policy,
1993, p. 195.
25 For an overview, see CRS Report RL30354, Monetary Policy and the Federal Reserve: Current Policy and
Conditions, by Marc Labonte.
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The Traditional Form of the Taylor Rule
The best-known version of the Taylor Rule is:
FFR = (R + I) + 0.5 x (output gap) + 0.5 x (I - IT)
where:
FFR = federal funds rate
R = equilibrium real interest rate (assumed here to equal 2)
output gap = percent difference between actual GDP and potential GDP
I = inflation rate
IT = inflation target (assumed here to equal 2)
If actual GDP is equal to potential GDP and inflation is equal to its target, this rule calls for the federal funds rate to
be 2% above the current inflation rate (because R = 2%). This is assumed to be the “neutral” interest rate, at which
monetary policy is neither stimulative nor contractionary.
The goal of achieving maximum employment is represented by the factor 0.5 x (output gap). The output gap is the
difference between actual and potential GDP. Potential GDP is the level of output that would be produced if all of the
economy’s labor and capital resources were being used. In economic downturns, actual GDP falls below potential
because some resources are idle; likewise, the economy can temporarily be pushed above a level of output that is
sustainable. In this rule, when the economy is below ful employment, the output gap is expressed as a negative
number, calling for lower interest rates. This Taylor rule states that when actual GDP is, say, 1% below potential
GDP, the federal funds rate should be 0.5 percentage points below the neutral rate.
Changes in inflation enter the Taylor rule in two places. First, the nominal neutral rate rises with inflation (in order to
keep the inflation-adjusted neutral rate constant). Second, the goal of maintaining price stability is represented by the
factor 0.5 x (I-IT), which states that the FFR should be 0.5 percentage points above the inflation-adjusted neutral rate
for every percentage point that inflation (I) is above its target (IT), and lowered by the same proportion when
inflation is below its target. Unlike the output gap, the inflation target can be set at any rate desired. For il ustration, it
is set at 2% inflation here, which is the Fed’s longer-term goal for inflation.
The variables in the same formula can also be rearranged to be expressed as:
FFR = R + 0.5 x (output gap) + 1.5 x I - 0.5 x IT
While a specific example has been provided here for il ustrative purposes, a Taylor rule could include other variables,
and any of the parameters (R, IT, and the weights on the output gap and inflation) could be set at any level.
Taylor rules are currently used in economic analysis to explain the Fed’s past actions or to offer a
baseline in an evaluation of what the Fed has done or should do in the future. A Taylor rule
(although with different parameters from this example) has been demonstrated to track actual
policy relatively well for the period lasting from after inflation declined in the 1980s to the
beginning of the financial crisis in 2007.26 Thus, it can be used in an economic model (which
offers a simplified version of the actual economy) to represent the Fed’s decisions under normal
economic conditions.
A limitation of the Taylor rule is that it was designed only to be used with the federal funds rate,
which was the Fed’s primary monetary policy instrument from roughly the early 1990s to late
2008. From December 2008 to October 2014, the Fed did not use the federal funds rate as its
primary policy tool because the rate was at the “zero lower bound”—it was set near zero, and thus
could not be lowered further. Instead, the Fed created new policy tools such as “quantitative
easing” (QE) to stimulate the economy.27 The Taylor rule cannot make policy prescriptions at the
zero lower bound—different combinations of deflation (falling prices) and output gaps would
26 Charles Carlstrom and Saeed Zaman, “Using an Improved Taylor Rule to Predict When Policy Changes Will Occur,”
Federal Reserve Bank of Cleveland, Economic Commentary, March 2014.
27 For more information, see CRS Report R42962, Federal Reserve: Unconventional Monetary Policy Options, by
Marc Labonte.
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prescribe a negative federal funds rate under the Taylor rule, but that prescription would not be
actionable. The Taylor rule was devised at a time when interest rates had never fallen to the zero
bound before, and it arguably seemed reasonable at the time to assume that the rule would not
need to cover this contingency.
Analysis
Economists and policy analysts have debated whether basing monetary policy on a Taylor rule
would lead to better economic outcomes than the status quo. The Fed already uses the Taylor rule
as a reference tool to help inform its policy decisions.28 Proponents would like the Taylor rule to
have a more formal role in policymaking, either requiring policy to be set by a Taylor rule or
requiring the Fed to explain its decisions relative to a Taylor rule.29 If the Fed desired, it could
arguably adopt these proposals voluntarily under current law (e.g., the FOMC could agree to base
their vote on a Taylor rule’s prescription). Legislative changes would be needed to require the Fed
to adopt these proposals, however.
The desirability of basing policy on a Taylor rule (whether it takes the form presented above or an
alternative form) can be viewed through the prism of the economic debate about the superiority of
rules versus discretion in policymaking.30 Economists who favor the use of rules argue that policy
is more effective if it is predictable and transparent. They argue that unpredictable policy results
in financial and economic instability. For example, there can be large movements in financial
prices when the Fed makes a policy change that “surprises” financial markets. A formal role for a
Taylor rule could also potentially help Congress in its oversight capacity by providing a clear
benchmark against which the Fed’s decisions could be evaluated.
Economists favoring discretion argue that policymakers need flexibility to manage an inherently
complex economy that is regularly hit by unexpected shocks. For example, rules might have
hindered the Fed’s ability to respond to the housing bubble and the financial crisis. In principle, a
Taylor rule need not be limited to inflation and the output gap, but making it more complex would
reduce the perceived benefits of transparency and predictability. Likewise, periodically modifying
the form that the Taylor rule takes in response to unforeseen events would reduce predictability
and increase discretion. Further, how could a Taylor rule incorporate amorphous concerns about,
say, financial stability or asset bubbles when there is no consensus on how to quantify them? A
Taylor rule requires data points that are easy to measure and accurately embody a larger economic
phenomenon of concern. Using forecasts would probably be preferable to using actual data in the
Taylor rule since monetary policy affects the economy with lags, but would potentially
reintroduce policy discretion (since the Fed would produce the forecast). Further, if perceived
policy errors by the Fed were mainly caused by forecasting errors (e.g., the failure to identify the
housing bubble), then using a Taylor rule based on forecasts would probably not have prevented
them. These issues could be addressed by modifying the Taylor rule, but this would arguably
reduce the perceived benefits of a rules-based regime.
Other practical challenges with formalizing use of the traditional Taylor rule in policymaking
include (1) requisite data are released with lags and later revised; (2) the neutral rate of interest
28 See, for example, Janet Yellen, “Perspectives on Monetary Policy,” speech at the Boston Economic Club Dinner,
June 2012.
29 See, for example, John Taylor, “Legislating a Rule for Monetary Policy,” speech at the Cato Institute, November 18,
2010.
30 Milton Friedman, “Monetary Policy: Theory and Practice,” Journal of Money, Credit, and Banking, vol. 14, 1982, p.
98.
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and potential output growth cannot be directly observed and may vary over time,31 making them
difficult to estimate accurately in real time; (3) basing the FFR on only inflation and the output
gap would make it more volatile; (4) public comprehension; and (5) addressing the zero bound
issue.
Rules were originally favored by economists who believed that Fed discretion was responsible for
high inflation, but inflation has been low since the 1990s and below 2% by the Fed’s preferred
measure since 2013. Recently, Taylor rules have been used to support criticism that the Fed has
engaged in too much stimulus.32 Policy rules in general do not inherently have a pro- or anti-
stimulus bias, however, as their parameters can be adjusted to meet policymakers’ goals.
Policymakers who emphasize price stability could put a relatively high weight on the inflation
parameter. Alternatively, policymakers who want the Fed to be responsive to (high or low) growth
could put a relatively high weight on the output gap parameter. Since the form that a Taylor rule
takes involves, in part, value judgments about the goals of monetary policy and the best way to
achieve those goals, choosing its form involves political tradeoffs as well as economic modeling.
As mentioned above, the Fed already uses Taylor rules as reference tools; under a rules-based
regime, the Fed would base its policies on the prescriptions of a Taylor rule most or all of the
time. As long as the Fed prefers discretion, it can only be forced to adopt rules-based policy
through legislation. It would arguably be difficult, however, for Congress to determine what
would be the best form of Taylor rule for the Fed to follow or when the Fed should be allowed to
deviate from the rule’s prescription. It needs the Fed’s cooperation to devise and implement a
rules-based policy, but the Fed has little incentive to tie its own hands. If Congress wanted the
Fed to adhere to both the spirit and letter of any law that reduced the Fed’s discretion, it may need
to find legal carrots or sticks to succeed. But exposing the Fed to negative consequences when it
does not follow the monetary policy that Congress prefers is antithetical to the Fed’s
independence from Congress. It provides Congress a new avenue to potentially apply political
pressure on the Fed’s monetary policymaking, even if that is not the proponents’ intent. Thus, the
challenge for proponents of rules-based policy is how to reduce Fed discretion without
compromising the Fed’s independence.
Policy Proposals
S. 1484 would require the Fed to include in a quarterly report to Congress on monetary policy and
the economy a discussion of any mathematical rules or other strategies it uses in monetary policy
deliberations and how policy has deviated from those rules and strategies. A monetary policy rule
like the Taylor rule would presumably meet this requirement.33
H.R. 3189 would require the Fed to formulate a mathematical rule (called the “Directive Policy
Rule”) that would instruct it how to set monetary policy (e.g., prescribe the current level of the
federal funds rate) that would achieve its mandate of stable prices and maximum employment
31 Recent research suggests that the neutral rate has fallen since the financial crisis, in which case the traditional Taylor
Rule would have set interest rates too high. See, for example, William Dupor, “Liftoff and the Neutral Rate,” Federal
Reserve Bank of St. Louis, Economic Synopses, no. 12, June 2015, https://research.stlouisfed.org/publications/
economic-synopses/2015/06/05/liftoff-and-the-natural-rate-of-interest/.
32 See John Taylor, “Monetary Policy Rules Work and Discretion Doesn’t,” Journal of Money, Credit, and Banking,
vol. 44, no. 6, September 2012, p. 1017. Taylor uses a Taylor rule to argue that there has been too much monetary
stimulus since 2003. The traditional Taylor rule was not designed to prescribe unconventional policies, but it does not
follow that the adoption of a Taylor rule would prevent unconventional policy because, in principle, a new version of
the rule could be designed to base unconventional policies on, say, data on inflation and the output gap.
33 For more information, see CRS In Focus IF10207, Monetary Policy and the Taylor Rule, by Marc Labonte.
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based on macroeconomic variables. It would be required to publish a five-year projection of
inflation under its rule. It would also require the Fed to calculate a traditional Taylor Rule (called
the “Reference Policy Rule” in the bill), as described in the text box, and compare it to the
Directive Policy rule. Within 48 hours of a policy decision, the Fed would be required to submit
the prescription of its rule to GAO and the committees of jurisdiction. GAO would report to
Congress if the Fed was in compliance with the requirements of the act, and if it was not, it would
trigger a GAO audit that was not subject to the normal statutory restrictions (described above)
and testimony by the Fed chair before the committees of jurisdiction.
Emergency Lending
Background
Under normal authority, the Fed faces statutory limitations on whom it may lend to, what it may
accept as collateral, and for how long it may lend. If the Fed wishes to extend credit that does not
meet these criteria, it can turn to emergency lending authority found in Section 13(3) of the
Federal Reserve Act.
The worsening of the financial crisis in 2008 led the Fed to revive this obscure provision to
extend credit to nonbank financial firms for the first time since the 1930s. Using this authority,
the Fed created six broadly based facilities (of which only five were used) to provide liquidity to
“primary dealers” (i.e., certain large investment firms) and to revive demand for commercial
paper and asset-backed securities. More controversially, the Fed provided special, tailored
assistance exclusively to four firms that the Fed considered “too big to fail”—AIG, Bear Stearns,
Citigroup, and Bank of America.
Credit outstanding (in the form of cash or securities) authorized by Section 13(3) peaked at $710
billion in November 2008. At present, all credit extended under Section 13(3) has been repaid
with interest and all Section 13(3) facilities have expired. Contrary to popular belief, under
Section 13(3), the Fed earned income of more than $30 billion and did not suffer any losses on
those transactions. These transactions exposed the taxpayer to greater risks than traditional
lending to banks through the discount window, however, because in some cases the terms of the
programs had fewer safeguards.
The restrictions in Section 13(3) placed few limits on the Fed’s actions in 2008. However, in
2010, the Dodd-Frank Act added more restrictions to Section 13(3), attempting to ban future
assistance to failing firms while maintaining the Fed’s ability to create broadly based facilities.34
The Dodd-Frank Act also required records for actions taken under Section 13(3) to be publicly
released with a lag and required the GAO to audit those programs for operational integrity,
accounting, financial reporting, internal controls, effectiveness of collateral policies, favoritism,
and use of third-party contractors.
For more information, see CRS report CRS Report R44185, Federal Reserve: Emergency
Lending, by Marc Labonte.
34 The Fed issued a final rule implementing Dodd-Frank changes to Section 13(3) on November 30, 2015. See Federal
Reserve, "Extensions of Credit by Federal Reserve Banks," RIN 7100-AE08, November 30, 2015,
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151130a1.pdf.
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Analysis
The Fed’s use of Section 13(3) in the crisis raised fundamental policy issues: Should the Fed be
lender of last resort to banks only, or to all parts of the financial system? Should the Fed lend to
firms that it does not supervise? How much discretion does the Fed need to be able respond to
unpredictable financial crises? How can Congress ensure that taxpayers are not exposed to
losses? Do the benefits of emergency lending, such as quelling liquidity panics, outweigh the
costs, including moral hazard? How can Congress ensure that Section 13(3) is not used to “bail
out” failing firms? Should the Fed tell Congress and the public to whom it has lent?
A Fed governor has opposed further reducing the Fed’s discretion under Section 13(3) on the
grounds that the Fed needs “to be able to respond flexibly and nimbly” to future threats to
financial stability.35 Although Section 13(3) must be used “for the purpose of providing liquidity
to the financial system,” some Members of Congress have expressed interest in—while others
have expressed opposition to—the Fed using Section 13(3) to assist financially struggling
entities, including states, municipalities, and territories of the United States.
Policy Proposals
Some Members of Congress believe that the Dodd-Frank Act did not sufficiently limit the Fed’s
discretion. H.R. 3189 would amend Section 13(3) to limit the Fed’s discretion to make emergency
loans. It would limit 13(3) to “unusual and exigent circumstances that pose a threat to the
financial stability of the United States” and would require “the affirmative vote of not less than
nine presidents of Federal reserve banks” in addition to the current requirement of the affirmative
vote of five Fed governors. It would forbid the Fed from accepting as collateral equity securities
issued by a borrower. It would require the Fed to issue a rule establishing how it would determine
sufficiency of collateral; acceptable classes of collateral; any discount that would be applied to
determine the sufficiency of collateral; and how it would obtain independent appraisals for
valuing collateral. It would eliminate the current language permitting the Fed to establish the
solvency of a borrower based on the borrower’s certification and would specify that before a
borrower may be eligible for assistance, the Fed’s Board and any other federal banking regulator
with jurisdiction over the borrower must certify that the borrower is not insolvent. It would limit
assistance to institutions “predominantly engaged in financial activities” and preclude assistance
to federal, state, and local government agencies and government-controlled or sponsored entities.
It would require the Fed to issue a rule establishing a minimum interest rate on emergency loans
based on the sum of the average secondary discount rate charged by the Federal Reserve banks
over the most recent 90-day period and the average of the difference between a distressed
corporate bond index (as defined by a rule issued by the Fed) and the Treasury yield over the
most recent 90-day period.
Concluding Thoughts
The various proposals reviewed in this report are wide ranging and diverse; many are united by
the goals of increasing the Fed’s accountability to Congress and decreasing Fed discretion. While
some provisions make very minor changes, taken together the proposals would arguably
35 Governor Jerome H. Powell, “'Audit the Fed’ and Other Proposals,” speech at the Catholic University of America,
Columbus School of Law, Washington, DC, February 9, 2015, http://www.federalreserve.gov/newsevents/speech/
powell20150209a.htm.
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somewhat reduce the Fed’s independence from Congress. There is a long-standing policy debate
about how independent regulatory agencies should be from Congress and the Administration,
with proponents of independence arguing that it will lead to more technocratic decisionmaking
and opponents arguing it leads to opaque, undemocratic, and unresponsive decisionmaking. For
decades, the Fed has enjoyed an unusual degree of independence from Congress and the President
compared with other government agencies, which has typically been justified in terms of
insulating its monetary policy decisions from political pressures.36 To some extent, a tradeoff
between independence and accountability is unavoidable. Besides the Taylor Rule, few of the
provisions reviewed here directly relate to monetary policy, but may individually or jointly
indirectly influence monetary policy through changes in how decisions are made, who makes
decisions, and Congress’s oversight of those decisions.
Author Contact Information
Marc Labonte
Specialist in Macroeconomic Policy
mlabonte@crs.loc.gov, 7-0640
36 For more information, see CRS Report R43391, Independence of Federal Financial Regulators, by Henry B. Hogue,
Marc Labonte, and Baird Webel.
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