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Mark Calabria and Aaron Klein: Federal Reserve dividends are wrong road for a highway funding fix

The Hill

Monday, October 26, 2015

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Even seasoned watchers of the Federal Reserve were shocked when the Senate attempted to change an obscure dividend rate paid by the Fed to the banks, which are technically the owners of the Federal Reserve System. This interest rate had been set more than a century ago and never altered, even as the rest of the Federal Reserve System, leadership, mission, and responsibilities have undergone significant changes. One of the many problems with this proposal is that it did not receive consideration from any committee of jurisdiction in Congress. There have been no hearings focused on the issue. Perhaps worst of all, such would set a dangerous precedent in which changes to the Federal Reserve, including ways in which it conducts monetary policy could be used to fund anything, as in this case it is being used to fund a surface transportation bill.

As former Senate Banking Committee staff, from different sides of the aisle, we have both spent considerable time examining the Federal Reserve. While we have strong differences of opinion on a number of Federal Reserve issues, both of us believe that the Federal Reserve Act could be improved. But we also believe changes to the Fed should result from careful deliberation and be not used as a random piggy bank for the topic de jour.

To be clear, we are not endorsing the current dividend rate of 6 percent as the proper figure for eternity. Perhaps the current 6 percent is not the right number – although we note that it has existed for more than a century– untouched. We simply think it is hard to make such conclusions in the absence of analysis, which up to this point have been solely lacking. What will the effects be of such a change on regulated banks that choose to switch their regulator as a result of this change? What are the precedents for additional legislative changes to how the Fed conducts monetary policy? Is this the start of Congress going down a road to change Federal Reserve tools to come up with money for unrelated purposes?