When the head of one of New York’s top unions was named chairman of the Federal Reserve Bank of New York’s board last year, more than a few observers’ jaws hit the floor.
After all, what was the head of a union, a man who represents everyday working stiffs, doing at the helm of the regional central bank most entwined with Wall Street? Never mind that the board of any Fed regional bank is not involved in any meaningful level of policy making. New York AFL-CIO President Denis Hughes’s appointment was a head-scratcher that led to conspiracy theories.
Now in yet another ironic twist: At a time of intense populist anger at the central bank, Hughes is one of its strongest defenders. Congress, angered by the Fed’s inability to spot the financial crisis and by its subsequent bailout efforts, is looking to clip policy makers’ wings in big ways. In response, the labor leader laments how poorly the central bank is understood and says he fears for the institution’s future.
Hughes, who spoke Wednesday at a Partnership for New York City event that also featured an address by New York Fed chief William Dudley, admitted his current perch is a “schizophrenic role.” The problem, as he sees it, is that many in the general public believe the Fed “does not work for them” and is instead a stooge for the financial sector.
Given the extraordinary interventions and bailouts the Fed has been involved in since late 2007, it’s not a crazy thought, the official allowed. But Hughes says by helping create stability on Wall Street, the Fed has in fact been “a system that’s worked very well” for the nation as a whole.
As congressional knives come out for the Fed, Hughes says “there is a real danger” that a misguided Congress, supported by an angry public and uninformed news media, will do something that “will change the Federal Reserve system in a way that will make it inefficient” in its role of creating stability. It’s possible that by the time Congress is done, the Fed could even be “irrelevant,” Hughes said.
Hughes’s appreciation of the Fed followed Dudley’s speech, in which the New York Fed president defended the central bank’s conduct during the financial crisis. Dudley also warned that congressional efforts that could see monetary policy making audited and banking supervisory activities moved out of the central bank could threaten the Fed’s ability to keep inflation low and growth moving higher.
Other participants in Wednesday’s event offered similar sentiments. From former Fed governor and current TIAA-CREF leader Roger Ferguson to insurer Metlife head C. Robert Henrikson and Sullivan & Cromwell’s H. Rodgin Cohen, all agreed that a paramount threat to the future of the financial system is the possibility that the Fed could be stripped of important and valuable powers by those who don’t see the good the institution can do.
Right now, the Fed’s fate is undecided. Financial reform efforts are shrouded in uncertainty. The vigor to pass auditing legislation has been surprising strong. The new year could prove a defining chapter in the Fed’s nearly century-long history.