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Federal Reserve faces mounting pressure from GOP over independence

Empowered by a Donald Trump presidency and a majority in both chambers of Congress, Republicans are calling on the Federal Reserve to more closely align itself with the White House. The development could raise concerns about the regulator's independence and potentially halt the development of international regulations.

In a letter sent Jan. 31, Rep. Patrick McHenry, R-N.C., wrote that it is "unacceptable" that the Fed continues to negotiate international regulatory standards while President Trump assembles his administration. McHenry specifically calls out the Financial Stability Board, the Basel Committee on Banking and Supervision and the International Association of Insurance Supervisors in claiming that the Fed's dealings have raised capital requirements and curbed economic growth in the United States.

Federal Reserve spokesperson Eric Kollig said "we have received the letter and plan to respond."

The rhetoric represents a call for the Fed to follow the new president's strong anti-regulation domestic platform and "America first" perspective on international affairs, raising concerns about the Fed's independence from politics. A spokesman for McHenry told Bloomberg News that the Fed should coordinate with the White House. McHenry's office did not immediately respond to a request for comment.

"If you're a big believer in Fed independence, which obviously the Fed is, you're not going to be happy with any suggestion that there should be talks with the White House," said Ian Katz, a director for financial policy research company Capital Alpha Partners. Katz said he expects the GOP to continue launching criticisms of the Fed until Trump can have direct control through political appointments.

On monetary policy, the House Financial Services Committee has suggested employing a more rules-based policy that would be transparent to legislators and the American public at large.

McHenry's letter could also represent a freeze for the so-called Basel IV package of banking regulations considering Europeans have criticized the reforms. The Basel Committee's work on the rules, which are standards over how banks calculate risk, was scheduled for earlier this year, but European regulators delayed any further negotiations as observers look for more clarity on the Trump administration's intentions for financial regulation.

"The Germans have been eager to walk away, so I think this represents a pause in Basel," said Mark Calabria, director of financial regulation studies at the Cato Institute.

But Basel might not serve as the best example of restrictive international agreements, since U.S. banks generally follow requirements for output floors that are higher than those in existing Basel III requirements. Similarly, the Fed has developed its own calculations for evaluating systemic risk rather than rely on the international regulatory body known as the Financial Stability Board. A spokesman for the international regulatory body declined to comment, saying McHenry's letter was addressed to the Fed.

The McHenry letter may be an entry point to broader criticism of the Fed's independence, a Republican talking point even before Trump's election. Although agencies like the SEC saw a leadership change with the transfer of administrations, the Federal Reserve has remained largely untouched with all of its board members and chairs still in place. Fed Chair Janet Yellen has maintained that the agency does not bend to the will of the administration.

"The administration, at least the ones that I've had any direct experience with, have definitely respected the independence of the Fed," Yellen said in a Jan. 18 discussion at the Commonwealth Club.

Trump's pick to lead the Treasury Department, Steven Mnuchin, said in a written response to questions from senators that the Fed "is organized with sufficient independence" but that he endorses increased transparency from the regulator.

While the administration has not said much about the Fed since Inauguration Day, Congress has already made moves to leash the agency. A few weeks after Trump's election, the House introduced legislation sponsored by Rep. Blaine Luetkemeyer, R-Mo., directing federal regulators to solicit public comments, consult with state officials and report to Congress before adopting international capital standards or other requirements for U.S. insurance companies. House Financial Services Committee Chairman Jeb Hensarling, R-Texas, struck a very Trump-like tone while introducing the bill on the House floor.

"[The bill] provides greater transparency, it allows for a stronger Team USA in negotiations, it sends a signal to foreign governments and international organizations that the U.S. again will lead and not be led into bad agreements," Hensarling said.

The bill passed the House by a vote of 239-170 but failed to get a Senate vote before the 114th Congress completed its session.