Yellen concerned about use of Fed surplus for highway bill

Federal Reserve Chairwoman Janet Yellen said Thursday that she is opposed to a congressional plan to pay for a federal highway spending bill by dipping into the central bank’s surplus account.

Yellen was reiterating her long-held concern with Congress’s proposal to shift funding from the Federal Reserve’s capital account to help pay for a five-year $305 billion highway bill, which easily passed the House on Thursday.

{mosads}”This concerns me,” she told the Joint Economic Committee during a hearing on Capitol Hill. 

“I think financing federal fiscal spending by tapping the resources of the Federal Reserve sets a bad precedent and impinges on the independence of the central bank. It weakens fiscal discipline,” she said. 

She argued that repurposing the Federal Reserve’s capital surplus “doesn’t actually create any new money for the federal government.”

Yellen noted that a Congressional Budget Office cost estimate made the same point and that, instead, the shift of funds reduces the future payments from the central bank to the Treasury.

“A transfer of those funds would have no effect on national savings, economic growth or income,” Yellen said, quoting the CBO report.

“So, in effect by taking our surplus, our holdings of U.S. Treasury securities declines,” she told the panel.

“The interest we would earn on those securities would be money that would be transferred every year for many years to come back to the federal coffers,” she explained.

“By taking this surplus now you’re diminishing this stream of revenues into the federal budget over many years.”

In total, the move would transfer $53 billion over 10 years from the Fed’s capital account — which are surpluses held by the Fed’s banks — to the Treasury to help pay for the House-Senate compromise legislation. 

That measure is expected to pass the Senate on Friday and the White House has said that President Obama will sign it.

Yellen argued that while the role of capital in a central bank differs from regular banks, holding a surplus is “something I believe enhances the credibility and confidence in the central bank.”

“We don’t have a lot of capital but we’ve long had capital in surplus that I think creates confidence in our ability to manage monetary policy,” she said.

JEC Chairman Sen. Dan Coats (R-Ind.) said he appreciated the answer because “there is the narrative that this easy money.”