WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan yesterday rejected proposals in Congress to reform the Fed, warning that they would politicize monetary policy and cripple the economy with higher inflation.
Appearing before the House Banking Committee, Greenspan said that by interfering with the Fed's independence, Congress might end up raising interest rates and taking the nation back into recession.
"The temptation is to step on the monetary accelerator, or at least to avoid the monetary brake, until the next election," Greenspan told the panel. "Giving in to such temptations is likely to impart an inflationary bias to the economy and could lead to instability, recession, and economic stagnation.
"Interest rates would be higher, and productivity and living standards lower, than if monetary policy were freer to approach the nation's economic goals with a longer-term perspective."
A bill introduced by committee Chairman Henry Gonzalez, D-Tex., would require all 12 members of the Federal Open Market Committee, which sets monetary policy, to be appointed by the President, subject to Senate confirmation. Currently, the seven members of the Federal Reserve Board on the open market committee are presidential appointees, while the remaining five members are presidents of the Federal Reserve District banks selected by each bank's board of directors.
Greenspan rejected the view of Fed critics that the bank presidents are mainly representatives of commercial banking interests. He said he was impressed with the ability of the bank presidents to bring regional economic information to the table in FOMC deliberations.
Greenspan also ruled out legislation offered by Rep. Lee Hamilton, D-Ind., and Sen. Paul Sarbanes, D-Md., that would remove the Fed bank presidents from the FOMC and leave monetary policy in the hands of the Board of Governors. That would only concentrate the power to set interest rates in fewer hands, Greenspan said.
The hearing did not appear to put much momentum behind the drive by Gonzalez and others to reform the Fed, although Rep. Jim Leach, R-Iowa, the committee's ranking minority member, said he now favors making minor changes in the central bank's organization. Leach suggested keeping the Fed bank presidents on the FOMC but having been appointed for specific terms by the Board of Governors.
"The best way to protect the independence of the Fed is to insure that its indefensibly undemocratic elements are rooted out," Leach said. "The issue isn't populist; it's prudential. In a democracy, arrogance always gets its comeuppance."
Greenspan did not endorse Leach's proposal, and other committee members from both parties said they will continue to oppose any major reform legislation. "The Federal Reserve is an ideal place to have some insulation," said Rep. Charles Schumer, D-N.Y. "We could mess up monetary policy royally."
Asked by reporters about the prospects of legislation going forward, Rep. Barney Frank, D-Mass., said "probably not right now." But the prospect of legislation "is insuring relations" between Greenspan and President Bill Clinton, he said. "Greenspan has some motivation not to get any daylight between himself and Clinton."
In a recent letter to Gonzalez, Clinton said he does not favor legislation to reform the Fed "at this time," and he expressed concern that it could rattle financial markets. "I clearly subscribe to the President's concern because that's mine," Greenspan said yesterday.
He also rejected proposals for prompt disclosure of the minutes from FOMC meetings, saying that the Fed's ability to maneuver in the bond market in the six-week intervals between meetings would be jeopardized.
Greenspan also said that the Fed does not support proposals by Gonzalez that would make the Fed's open market and foreign exchange operations subject to government audit.
In an opening statement before the committee, Hamilton said the two reform bills he introduced are not designed to make monetary policy subject to political influence by the administration or Congress. The Fed's practices and procedures "violate the normal standards of accountability in a democratic society," he said.
A provision in one of Hamilton's bill would require the Treasury Department and other economic policymakers in the administration to meet with FOMC members three times a year to consult on monetary and fiscal policy.