A possible US congressional probe into the appropriate number of regional Federal Reserve banks will hurt monetary policy if it leads to changes in the central bank's structure, a top Fed official said on Friday. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said the 12 regional Fed banks were deliberately established by Congress in 1913 to ensure a decentralised central bank, not one governed from Wall Street or Washington.
"They chose not to for a very good reason and that is concerns about ... political influence that can overwhelm in certain circumstances, that lead to a higher inflationary environment over time," he told Reuters in an interview.
Congress on Wednesday approved a measure that opens the door to an evaluation of the appropriate number and the associated costs of Federal Reserve banks, an implicit threat to the central bank's structure. "To give that up, you want to be very careful and very thoughtful, as the founders were, before you abandon (a) model that is so critically important to the Federal Reserve system, and to a broad base of support across this country," he said.
Hoenig said the threatened review may reflect congressional anger with the US central bank's role as the lender of last resort during the heat of the financial crisis last year. Some politicians are upset with the Fed's rescue of American International Group that they charge enabled the insurer to use taxpayer money to make whole bank counterparties, including foreign banks, which would have faced billions of dollars in losses if AIG went under.
But emergency action to calm financial markets after the collapse of Lehman Brothers Holdings, Inc in September was taken by the Federal Reserve's Washington-based Board of Governors, not the regional Fed banks. Hoenig said some people who would like to see the number of regional Fed banks whittled down have twisted the bailout debate to promote their own agenda.
"I think (it) is a longer-term issue that is tied up with different groups who may think we don't need 12 banks," he said. Critics of the central bank's structure say there are too many regional banks east of the Mississippi River, including the Kansas City and St Louis Fed banks, which are both in Missouri - a pattern that reflects the economy of 1913 rather than 2009.
"Do you really want to give up the other dimension, the private input across the country designed to provide another perspective and another independent view that I think is a critically important to making sure that we have an environment where low inflation and where input into the broader policy is better assured," Hoenig said.