WASHINGTON – Congressman Barney Frank today announced that he has introduced legislation that would make one of the most important functions of the Federal Reserve – the setting of interest rates – more democratic.

The bill, H.R. 1512, would remove from the twelve-member Federal Open Market Committee the five rotating members who are representatives of regional Federal Reserve Banks and chosen by the boards of private financial institutions without input or oversight by any publicly-elected body. 

“Now is the time to address one of the great anomalies in our democratic system – the way in which interest rates are set,” said Congressman Frank.  “Under current law, more than one-third of the votes cast are made by regional Federal Reserve representatives – people who are neither appointed by the President nor subject to Senate confirmation.  These men and women are chosen by a self-perpetuating group of private citizens who disproportionally represent the private financial services industry. Although it is useful to have the advice of the representatives of private interests, they should not vote on this extremely important issue of public policy.”

The Federal Open Market Committee has considerable power because of its ability to set short-term interest rates.  Changes in these rates can have a cascading effect in the economy, influencing the availability of capital, investment, inflation and unemployment.

While Frank’s bill eliminates the five seats on the FOMC which are effectively chosen by private industry, it does not affect the remaining seven seats held by members of the Federal Reserve Board of Governors, who are nominated by the President and confirmed by the Senate.  The legislation thus increases transparency and accountability on the FOMC.

The legislation introduced by Congressman Frank would amend Section 12A of the Federal Reserve Act which became law in 1913.