WASHINGTON — As the Federal Reserve Board prepares for a major expansion of its balance sheet, it and the Treasury Department are seeking legislation that would allow the central bank to better manage its book.
Though the Fed and the Treasury are not specifying the authority they are seeking, a bill could ultimately allow the central bank to take more money from the Treasury.
The added authority is necessary because of the creation of the Term Asset-Backed Securities Loan Facility, a program the central bank announced in November that is intended to liquefy the markets for consumer debt. The program finally began operation on Tuesday.
Under the current structure, the Fed is planning to support Talf by tapping the reserves financial institutions hold at the central bank. But the program could put the Fed on the hook for as much as $1 trillion in loans to investors, and reserve levels have been shaky in recent weeks, totaling $701.1 billion on Feb. 25.
In a press release issued Tuesday, the Treasury and the Fed appeared to acknowledge that alternatives to reserves will be necessary.
The Fed "must be able to manage its balance sheet, and in particular, to control the amount of reserves," the release said. "The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for Talf and for other key credit-easing programs."
Treasury and Fed representatives declined to comment further on what powers the agencies are seeking.
The Fed already borrows money from the Treasury through a "supplementary financing account" that was established in September and totaled nearly $200 billion on Feb. 25. It is unclear whether Congress would need to raise the debt ceiling to allow the Treasury to provide more funds to the Fed.
Another possible alternative — allowing the Fed to sell its own debt — has raised questions about whether a Fed note would be viewed any differently than a Treasury note by debt investors.
The Treasury and the Fed said subscriptions for $200 billion in Talf funding would begin on March 17. Ahead of that, the two agencies said they lowered the interest rate and haircut for loans secured by asset-backed securities backed by government-guaranteed student loans or the Small Business Administration.
Haircuts fell to 5%, from 7%, on government-backed student loans and to 5%, from 6%, on SBA loans.
Fed Chairman Ben Bernanke appeared before the Senate Budget Committee on Tuesday to discuss Talf and other efforts to revive the economy. His appearance came a day after the Fed helped orchestrate the fourth rescue of American International Group Inc.
Lawmakers repeatedly expressed frustration that the insurance giant is receiving seemingly endless support from the government.
"How is this rewarding ability and achievement?" asked Sen. Ron Wyden, D-Ore. "Right now, small businesses … can't get a line of credit while AIG has an open spigot."
Those concerns were echoed by Sen. Patty Murray.
"I'm really troubled by the manner with which we're dealing with AIG because of the risk exposure of the taxpayer," the Washington Democrat said.
In unusually emotional terms, the Fed chief said the repeated bailouts irked him.
"If there has been one episode that has made me more angry in the past few months, I can't think of one more than AIG," he said. "We had no choice but to try to stabilize the system."
Bernanke stands to gain tremendous power if Congress decides to shake up financial supervision by making the Fed a systemic risk regulator. He has not taken a position on whether the Fed should be granted that authority but said Tuesday that it might be helpful for a systemic risk regulator to have a say over the new products a big bank develops.
"Confidence in financial engineering has gone down quite a bit, and we need to be careful to make sure that products that are created have a real purpose," he said.
