Grand Central: Regional Fed Bank Boards Could Be Compromise Area in Reform Debate – Real Time Economics

The Wall Street Journal’s Daily Report on Global Central Banks for Wednesday, March 11, 2015:

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Federal Reserve Chairwoman Janet Yellen met with Senate Banking Committee Chairman Richard Shelby (R., Ala.) yesterday. Both were fairly mum about the discussion afterwards. Mr. Shelby is considering legislative proposals to change the Fed’s structure and governance. The Fed doesn’t like many of the proposals out there, most notably an effort by Sen. Rand Paul (R., Ky.) to subject the Fed to congressional investigations of its monetary policy decisions.

Is there any room for common ground between the Brooklyn-born economist and the Alabama senator over the Fed’s structure and oversight?

One area to watch is the role of directors at regional Fed banks. The 1913 law that created the Fed imposed an odd public-private structure in which commercial banks pay in capital to the 12 regional Fed banks. The commercial banks get dividends from the Fed on the paid-in capital. They also get to choose six of the nine seats on the boards of the regional Fed banks, three of which are bankers themselves.

Fed officials insist these directors have no role in the Fed’s regulation of banks. Still, the banks’ unique role creates an appearance of a conflict of interest and has been a source of embarrassment for the Fed in the past. J.P. Morgan chief executive Jamie Dimon was on the New York Fed’s board when the Fed was brokering a J.P. Morgan purchase of Bear Stearns in March 2008; Lehman Brothers CEO Richard Fuld was on the New York Fed board before Lehman’s collapse; Stephen Friedman, a Goldman Sachs director, was the New York Fed Board chairman during the financial crisis, when the Fed was supporting Goldman and he was buying Goldman stock.

Sen. Sherrod Brown (D., Ohio) has called for a review of the regional bank governance structure. The Fed might welcome some change on this front to address the appearance problem. While lawmakers are at it, they might consider changing paid-in capital at the regional Fed banks to a user fee for access to the Fed’s discount window. The paid-in capital creates an appearance the banks own the Fed.

-By Jon Hilsenrath


Fed Leans Toward Removing ‘Patient’ Promise on Rates. The Federal Reserve is strongly considering removing a barrier to raising short-term interest rates, by dropping its promise to be “patient” before acting. Discussions about interest-rate guidance and an uncertain inflation outlook are likely to take center stage at the Fed’s next meeting March 17-18.

Yellen and Shelby Discuss Small Bank Regulation. Senate Banking Committee Chairman Richard Shelby (R., Ala.) said he and Federal Reserve Chairwoman Janet Yellen, in a meeting Tuesday, discussed his plans for a legislative package aimed at reducing the regulatory burden on small banks. Mr. Shelby said he and Ms. Yellen also talked about the economy and issues facing the banking system. Ms. Yellen had no public comment after the meeting.

Central-Bank Moves Spook Investors. The euro slid closer to parity with the dollar, long-term bond yields in the eurozone nudged closer to zero and U.S. stocks tumbled—a stark demonstration of the reordering of the world’s financial system by its central banks.

Agence France-Presse/Getty Images

ECB’s Mario Draghi Defends Stimulus Program. European Central Bank President Mario Draghi on Wednesday defended the bank’s decision to launch a massive stimulus program centered on large-scale purchases of government bonds, saying such policies are a standard part of the tool kits of central banks around the world.

European Markets Watchdog Warns Government Bonds Not a Risk-Free Investment. A financial markets watchdog group headed by European Central Bank President Mario Draghi said Tuesday that the risk-free treatment of government bonds in some regulations may lead to excessive investment in these types of securities. A report from the European Systemic Risk Board, which Mr. Draghi chairs, noted that “for decades, the regulatory treatment of sovereign debt has significantly discounted and, in many cases, ignored the possibility of default on exposures that are denominated and funded in the country’s own currency.”

ECB’s Cœuré: Bank Will Be Able to Find Bonds to Buy. ECB Executive Board member Benoît Cœuré said the ECB will be able to find enough securities to buy as part of its public-sector bond-purchase program, even though there could be a scarcity of eligible assets.

BOE’s McCafferty: Wage Growth Could Spur U.K. Inflation Despite Oil Price’s Fall. Declining unemployment could drive wage growth in the U.K. to a pace inconsistent with keeping annual inflation at 2%, despite a sharp fall in the oil price, one of the Bank of England’s nine policy makers said Tuesday. Ian McCafferty said in a speech he thinks there’s probably less slack in the British economy to keep inflation at bay than the BOE’s central forecasts suggest.

Associated Press

BOE May Need to Adjust Inflation Target if UK Experiences Prolonged Supply. The Bank of England may need a lower inflation target in the future if technological advances bear down hard on price growth, the central bank’s governor said Tuesday. Mark Carney told a panel of lawmakers that rapid advances in automation and information technology could in future create a “positive supply shock” that keeps a lid on wages and prices across the economy. In such a situation, “there might be a case for adjusting the level of the inflation target,” he said.

Thailand Cuts Rates. Thailand’s central bank cut its benchmark rate on Wednesday, shrugging off concerns about rising debt amid efforts to boost growth. In a surprise move, the Bank of Thailand joins a raft of central banks from India to Canada in easing monetary policy, cutting its benchmark interest rate by a quarter percentage point to 1.75%. The bank had kept rates steady since last March.

Asian Central Banks’ Dilemma: Balancing Debt and Growth. While slowing growth has given central banks across Asia room to cut rates, some are doing so timidly, fearing an even greater buildup in debt.

Swedish Inflation Rate Turns Positive. Sweden’s annual inflation rate ticked higher in February, providing the first positive reading in seven months and boosting the Swedish currency, but analysts say it may be still too early to write off further monetary easing by the central bank.

Czech Central Banker Sees Good Economic Prospects. The Czech central bank governor said Tuesday he is upbeat about the country’s economic prospects partly because of low crude oil prices helping export-focused manufacturers. Miroslav Singer also said he is positive about the euro area’s ability to restart economic growth –Dow Jones Newswires

Turkey Central Bank Raises Short-Term Foreign Currency Reserve Requirement. Turkey’s central bank on Tuesday raised short-term foreign currency reserve requirements for banks and financing, as the lira sank to new record lows in the past weeks. The central bank said the measure would boost its foreign-exchange reserves by about $1.3 billion. The move raises the amount that Turkish banks must park at the national lender to 20% from 18% for foreign currency deposits maturing in one year and to 14% from 13% for two-year maturities. The changes go into effect March 13. –Dow Jones Newswires.

Malaysia Central Bank: Economy On ‘Steady Growth Path’. Malaysia’s central bank said Wednesday the economy is expected to expand 4.5%-5.5% this year backed by resilient domestic demand that will cushion sharply lower exports. Inflation, meanwhile, should moderate, averaging 2.0%-3.0% in 2015 from 3.2% a year earlier, mainly due to lower prices of energy and food, helping to mitigate the impact from the introduction of consumption tax in April, Bank Negara Malaysia said in its annual report –Dow Jones Newswires.


Job Openings Rise to the Highest Level in 14 Years. Employers across the U.S. had 5 million job openings at the end of January, the most since January 2001, providing further hope that the labor market is on the mend. Openings have been rising across a range of industries, according to the Labor Department’s Job Openings and Labor Turnover Survey, known as Jolts. The level of hiring declined slightly in January, falling to 5 million from 5.2 million in December. The total number of people leaving their job declined slightly, too–separations fell to 4.8 million from 4.9 million. 


-ECB’s Nowotny speaks in Frankfurt at 1300 GMT

-BOE’s Weale speaks in London at 1500 GMT

-Fed releases complete bank stress-test results at 4:30 p.m. EDT


Currency Movements Take On a Bigger Share of Economic News. News coverage of the global economy turned slightly positive in February, according to data released Tuesday, and foreign-exchange movements are taking on more importance this year. The Absolute Strategy Research/Wall Street Journal global composite newsflow index edged up to 50.5 in February from 48.7 in January. An index above 50 denotes positive news coverage on economic topics. The U.S. newsflow composite index increased to 53.8 from 50.1. While up in February, both the global and U.S. indexes remain well below their averages of fourth-quarter 2014.


For the Fed, it’s a cold world out there, says Justin Lahart in the “Heard on the Street” column. “The Federal Reserve faces an inflation rate that has remained stubbornly below what it is aiming at. It has plenty of company around the world, complicating the Fed’s decision on when to start raising interest rates. Outside of countries that have seen sharp falls in their currency, such as Russia, it is hard to find a major economy where inflation is anything but low.”

China Economy Sputters Toward More Stimuluswrites Alex Frangos in the “Heard on the Street” column. “As the government’s read on the property market and jobs continues to worsen, more moves seem inevitable, including further loosening of mortgage restrictions, rate cuts and bank reserve requirement cuts,” he writes.


The Bank for International Settlements named Luiz Awazu Pereira da Silva as Deputy General Manager for a five-year term starting Oct. 1. Mr. Pereira da Silva has been Deputy Governor at the Central Bank of Brazil since 2010.

-The U.S. trade deficit excluding oil hit a record high in January, according to the latest Commerce Department data. It’s likely to continue widening since two major trends aren’t expected to disappear soon: A strong dollar and weak growth overseas.

The global economy grew at a slightly faster pace in 2014, as a modest revival in the eurozone and a pickup in India helped offset slowdowns in China and Japan.

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11 March 2015 | 11:17 am – Source:


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