WASHINGTON — Though the Federal Reserve Board is clearly opposed to handing off its consumer protection powers to a new agency, its proposed alternative has left many confused and others saying it would accomplish little.
In separate appearances before House panels last month, Fed Vice Chairman Donald Kohn and Elizabeth Duke, a governor, said Congress could explicitly mandate consumer protection as a core mission of the central bank instead of creating a new agency.
The comments were sufficiently vague so that, to some, it sounded as though the Fed was proposing to expand its dual mandate of promoting price stability and maximizing employment to include consumer protection — an idea many saw as unworkable.
"They already have a problem following the dual mandate because they tend to shift from one thing to the other," said Allan Meltzer, a professor at Carnegie Mellon University and a noted Fed historian. "You put a third thing in there, and they have another reason for not doing what they're supposed to do."
Many said that, adding to the dual mandate, which Congress enacted in 1978, makes no sense.
Full employment and price stability are "so important," said George Kaufman, a finance professor at Loyola University in Chicago. "They're overwhelmingly more important than consumer protection. A stable economy dominates everything."
Others said consumer protection would be a messy fit with the two other mandates. "It's the 'what does not belong in this picture' question, and you'd have to say the consumer piece," said Cornelius Hurley, a former Fed lawyer who now directs the Morin Center for Banking and Financial Law at the Boston University School of Law.
Some Fed supporters said that it could help, arguing that consumer protection gels with broader oversight of the economy.
"Good consumer protection can be consistent with economic stability and safety and soundness," a former Fed official said. But Joseph Mason, a finance professor at Louisiana State University, questioned the broader impact such a change would have on the conduct of monetary policy.
"Think for a moment of a world where interest rate policy doesn't work, the Fed wants to expand lending and can't figure out how," he said. "One policy tool becomes to promise or implement laxity to [give] lenders [an incentive] to expand credit."
Fed officials declined to discuss this on the record, but in private they say Kohn's and Duke's comments were misinterpreted. What the central bank is advocating, these sources said, is a simple reopening of the Federal Reserve Act to add language to the preamble requiring that the Fed protect consumers. The preamble now mandates that the Fed supervise banks and maintain an elastic currency.
In her testimony, Duke told lawmakers they "could formally codify consumer protection as a core mission or responsibility for the Federal Reserve, similar to monetary policy and banking supervision and regulation."
But observers are equally critical of adding consumer protection language to the Federal Reserve Act as an explicit duty. The theory is that such a change would signify the elevated importance of consumer protection at the Fed and ensure that future leaders of the central bank dedicate sufficient resources to the issue.
"Putting it as a core function is basically telling the Fed to spend more money on this and we won't mind if, at the end of the year, you send $14 billion instead of $15 billion" to the Treasury, said Robert Litan, a senior fellow at the Brookings Institution.
But many said that would be little more than window dressing. After all, observers argue, Congress has passed a number of laws, including the Truth in Lending Act and the Home Ownership and Equity Protection Act, making clear that lawmakers felt the Fed has a role in consumer protection.
"Just go through and look at the Fed regs," said Bert Ely, an independent consultant in Alexandria, Va. "Consumer protection is already a significant part of their mission."
House Financial Services Committee Chairman Barney Frank appears to agree.
"One of the greatest unused examples of power were the consumer protection powers we've given the Fed," the Massachusetts Democrat told reporters last month.
Given that background, it is hard to believe that consumer protection would be any stronger in practice with an explicit mandate, said Kevin Jacques, the chairman of the finance department at Baldwin-Wallace College.
"I see this kind of talk as simply talk," he said. "I don't believe it will make consumer protection No. 1. The fact is the No. 1 job of the agency is the safety and soundness of the financial system, period. Consumer protection is simply further down the line."
The Federal Reserve Act has been amended frequently as the needs of financial markets and the desires of Congress evolve. The most recent change came in October when lawmakers gave the Fed authority to pay interest on reserves financial institutions hold at the central bank. But as scrutiny of the Fed has grown this year, a risk emerges that opening up the law to explicitly codify consumer protection could give lawmakers the chance to poke around in other areas as well.
"That's always the risk," said Douglas Landy, a former lawyer at the Federal Reserve Bank of New York who is now a partner at Allen & Overy LLP. "If the Federal Reserve Act is opened up, are they opening a can of worms that could work against them? Sure."
Both options carry risks to the Fed. Many observers said an enhanced consumer protection mandate would draw the Fed into the political fray more often, possibly reducing its prized independence and moving it further away from the traditional responsibilities of a central bank.
"The more objectives you have, the more difficult it is to stay out of the political arena," said Loyola's Kaufman. "The Fed's most important objective is monetary policy."
Speculation is rampant about why the Fed would want to keep its consumer protection power when it is fighting so many other battles, including worries about inflation, winding down liquidity facilities and proving to Congress that it can manage systemic risk. Some say it is simply a classic example of a Washington powerhouse working to avoid any loss of power and influence.
"The Fed has never left a power vacuum in Washington," said Louisiana State's Mason. "They've always been prepared to pick up power when it's made available."
Others said the strategy amounts to a Plan B in case Congress does not ultimately create the consumer protection agency. Rep. Frank has already delayed consideration of the issue in his committee, though he and the White House remain committed to its enactment.
"This is like a fallback strategy for the Fed and Congress itself," said Brookings' Litan.