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Fed could find scrutiny comes with new powers

As officials at the Federal Reserve may soon discover, more isn't always better.
/ Source: Reuters

As officials at the Federal Reserve may soon discover, more isn't always better.

On the face it, the results of the landmark regulatory reform bill finalized on Friday should have policymakers at the U.S. central bank running victory laps around Congress.

Despite self-professed regulatory shortcomings in the run-up to the worst financial crisis in modern history, the Fed has emerged from legislative reform efforts with its powers greatly enhanced.

But with financial markets still fragile and a debt crisis in Europe showing no sign of easing, the Fed's beefed-up authority to oversee broad risks to the financial system could come back to haunt it.

Unlike in the recent crisis, where regulators shared the blame, any renewed market meltdown might be laid squarely at the Fed's feet, even though it may still have to tussle with other agencies over how best to protect the financial system.

Moreover, the central bank's decisions, which could include tough calls like whether or not to break up a firm deemed to threaten financial stability, would likely draw heavy scrutiny from politicians.

"There is a very real risk that these expanded powers will make the Fed more subject to outside political influences," said Bob Eisenbeis, chief monetary economist at Cumberland Advisors and former research director at the Atlanta Federal Reserve Bank.

"The broader the mandates, the more potential for conflicts of regulatory goals to arise, and of course, one of the quid pro quos of the new powers will be more interaction with Congress," Eisenbeis said.

Despite strengthening the role of the Fed, the legislation does not completely eliminate the problem of having a wealth of different regulators who at times may work at cross purposes.

At the heart of the new supervisory structure is a systemic risk council headed by the Treasury. The Fed will be only one of the agencies on the council, though arguably the most powerful one.

"I do not expect it to work well and there is a risk the Fed will wind up being blamed for a group failure," said Anil Kashyap, a professor at the University of Chicago's Booth School of Business.