A House Banking subcommittee yesterday voted to abolish the Federal Open Market Committee, which makes basic decisions about the operation of money policy.
The subcommittee approved a bill under which the Federal Reserve Board of Governors alone would have the authority to make those decisions. .
Congressional sources, however, yesterday put the chances of the subcommittee measures becoming law this year at near zero. They also doubted whether there would be support for an amendment setting mandatory money supply targets in the future.
Rep. Henry Reuss (D-Wis.), cahirman of the House Banking Committee, praised the subcommittee's action and promised full hearing before the full committee. The hearings are expected to take place in the next month. Reuss has long been an advocate of such a move.
The FOMC at present is composed of five of the 12 presidents of the regional Federal Reserve banks in addition to the seven members of the Federal Reserve Board of Governors. The 12 regional presidents take turns serving on the committee.
Opponents of their role in public policy maintain that the presidents are not officers of the U.S. government and therefore should not be able to take decisions on monetary policy. The Fed, which has opposed their removal from policy making in the past, argues that they are public officials. Although not appointed by the president, nor approved by the Senate, the presidents of the regional reserve banks have to be approved by the Fed Board of Governors.
Another argument in favor of their presence on the policy-making committee, put forward in May by Fed Chairman Paul Volcker, is that it enhances the influence of the regions on Fed money policy. Without the participation of the reginal bankers, monetary policy would become too dominated by Washington, he argued in congressional testimony.
This point is likely to weigh heavily in Congress. There was criticism of the latest appointment to the Fed Board because he did not represent a particular reginal interest.
The subcommittee also adopted an amendment which would tie the Fed to specific targets for money growth in the future. The fed is certain to oppose this as well on the grounds that it would take away much needed flexibility from the Fed. Board Governor Nancy Teeters said yesterday "the setting of money targets should vary with the conditions of the economy rather than be put on a preset and invariable course."
But the move against the power of the regional bank presidents could gain momentum next year, they said. There will be more pressure for changes in the Fed in the future than there has been in the past, one banking expert commented.
The deregulation of the banking industry has given thrift institutions a more direct interest in the operation of money policy, and they could become a powerful lobby for changes in the Fed, he said.
The presidents of the regional reserve banks are chosen by the regional banks, which have six members appointed by the member banks and three members appointed by the Fed. The regional reserve banks are privately incorporated and owned by the member banks.
The FOMC meets once a month to decide how much the money supply should be increased or reduced through the purchase or sale of securities to the banks.
Reuss has also complained about the weighting of the reserve bank representation on the committee in favor of New York, which serves every year, and Cleveland and Chicago, which serve every other year. The remaining reserve banks -- Boston, Philadelphia, Richmond, Atlanta, Dallas, St. Louis, Minneapolis, Kansas City and San Francisco -- serve every third year.