The president of the Federal Reserve Bank of New York defended his turf against escalating calls in Congress to curtail the powers of the Federal Reserve and increase oversight of the institution.
In a speech delivered Jan. 21 to members of the Partnership for New York City, William Dudley acknowledged that changes to an “obsolete regulatory system” are needed, but said taking power from the central bank and auditing its monetary policy practices was not the answer.
“In drawing up new legislation, it's important not to throw the baby out with the bath water,” he said. “We should preserve what has worked and fix what hasn't.”
Mr. Dudley said allowing the U.S. Government Accountability Office to audit Fed monetary policy would be “a potential first step toward the politicization of a process that Congress has carefully sought to insulate from political pressures.”
The Fed's credibility with market participants and investors could take a hit by creating “the appearance that the legislature seeks to influence monetary policy decisions by establishing a mechanism to publicly second-guess those decisions.” That would hurt the Fed's ability to operate effectively, he added.
Mr. Dudley also expressed concern about proposals that would move the regulatory and supervisory function of the Fed to other agencies. “Further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system,” he said.
In his prepared remarks, Mr. Dudley also called for the development of a system that would allow for the “orderly wind-down” of a failing institution — one that would limit the effect on the broader financial system.
In a question-and-answer session that followed, he expressed sympathy for Americans who are upset with outsized executive compensation packages at banks that received federal bailout funds. “That's really unfair in the context of a 10% unemployment rate,” he said. “I understand why people are upset.”
But Mr. Dudley said Wall Street was making strides toward linking performance and compensation, particularly with deferred compensation and so-called clawback plans that would reward bankers only if their investments panned out over time.
Daniel Massey is a reporter at Crain's New York Business, a sister publication of Pensions & Investments.