Fed's authority likely will be restricted, Volcker says

By Timothy R. Homan
Bloomberg News
Saturday, April 18, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=ainh3qdHJuoM&refer=home

WASHINGTON -- Former Federal Reserve Chairman Paul Volcker said Congress will probably review the authority granted to the Fed following emergency credit programs doubling the central bank's balance sheet to $2.19 trillion.

"I don't think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken," Volcker, head of President Barack Obama's Economic Recovery Advisory Board, said today at a conference at Vanderbilt University in Nashville, Tennessee.

U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority by creating several emergency credit programs aimed at reviving lending and ending the recession.

"I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed," Volcker said.

Under the act the central bank may in "unusual and exigent circumstances" lend to "any individual, partnership, or corporation" as long as the loans are secured "to the satisfaction" of the Fed.

Lawmakers including House Financial Services Committee Chairman Barney Frank have said Congress should consider revising the Depression-era emergency provision.

The central bank has been using such powers "with great abandon," Frank, a Massachusetts Democrat, told reporters in January. "Ultimately we have to do something about this statute."

Volcker didn't predict the future powers of the central bank.

"It'll be very interesting to see what the role of the Federal Reserve will be," Volcker said. The possibilities "range all the way from giving the Federal Reserve more supervisory and regulatory responsibility to largely taking away" those powers.

Volcker dismissed concerns the U.S. has entered a depression while saying a recovery will be slow.

"It's hard to see that we're going to have a very rapid recovery," he said. "We are in a great recession, for sure."

Gross domestic product fell at a 5 percent annual pace last quarter and will drop at a 2 percent rate in the following three months, according to the median estimate in a Bloomberg News survey earlier this month.

The unemployment rate climbed to a 25-year high of 8.5 percent in March, from 8.1 percent the previous month. The U.S. has lost about 5.1 million jobs since the recession started in December 2007.

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