WASHINGTON -- President Bill Clinton has blunted a drive by the chairman of the House Banking Committee for legislation to reform the Federal Reserve and make Fed officials more accountable to the public.

In a Sept. 20 letter to Henry Gonzalez, D-Tex., Clinton told the committee chairman that "on balance, I am disinclined to seek a change in the Federal Reserve Act at this juncture." Gonzalez, who plans an extensive set of oversight hearings next month on the way the Fed operates, released copies of the letter; on Friday.

Clinton said the main reason he does not want legislation "is a general feeling that the system is functioning well and does not need an overhaul just now."

Clinton specifically ruled out a bill packed by Gonzales that would require all members of the Federal Open Market Committee, the Fed's policy arm, to be appointed by the President and confirmed by the Senate. Currently, the seven members of the Federal Reserve Board who sit on the committee are presidential appointees, while the remaining five seats are filled by Fed district bank presidents.

"Changing the way bank presidents are elected at this time runs the risk of undermining market confidence in the Fed," Clinton said. "There is a virtue, in having The Federal Open Market Committee input [and votes] that truly come from outside Washington."

The President's statement effectively put him on the side of Federal. Reserve Board Chairman Alan Greenspan, who has said he opposes making all FOMC members political appointees.

Greenspan has also rejected another Gonzalez proposal to require immediate disclosure of the FOMC minutes, arguing that to do so would undermine Fed's. flexibility to conduct monetary policy in the six-week periods between committee meetings.

Gonzalez is probably the most vocal and persistent critic of the Fed. in Congress. He has sent a stream of letters to Greenspan complaining about slow, growth in the money supply and arguing that the central bank's monetary policy is a main factor in throttling economic growth. He has also asked Greenspan to account for the composition of the FOMC, commercial bank rates, and several other issues involving the way the Fed operates.

In a July 22 letter to the President, Gonzalez, complained that Fed policymakers are an inbred group of "bankers or friends of bankers" who fail to reflect the needs of small business, labor, community groups. and others. He has also hounded the Fed for not having more women and minorities in the upper ranks.

There has been little show of support from members of Congress for Gonzalez, perhaps because the Fed has repeatedly trimmed interest rates the last four years and has kept the federal funds rate at 3% for the last year.

Still, the October hearings promise to be a showcase for the Texas Democrat and other Fed critics to take some shots and get plenty of press. William Greider, author of "Secrets of the Temple," is scheduled to testify Oct. 7 on Fed accountability. In his book, Greider argues that the Fed's institutional bias is to protect bond investors rather than foster growth. Greenspan is slated to appear before the banking panel Oct. 13.

In a statement issued last week. Gonzalez said the hearings will focus on changing FOMC selection procedures, immediate release of the FOMC minutes, Fed hiring practices, and proposals to expand federal audits of Fed market activity.

Gonzalez said he wants the General Accounting Office to audit the central bank's open market operations to find out if there is "unnecessary buying and selling" of government securities that enrich the primary dealers.

Fed open market operations in 1992 exceeded $800 billion, Gonzalez said. The Fed turned over net earnings of $16.77 billion to the Treasury after expenses, according to the central banking annual report.

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