Treasury Secretary Scott Bessent said Wednesday he will push for a new rule requiring regional Federal Reserve chairpersons to live in their district for at least three years.

The initiative is Bessent's latest push for a major overhaul of the US central bank—which he has repeatedly accused of mission drift and straying from its primary mandate of setting monetary policy.

"I believe there is a disconnect now from the original framework" of the Fed, Bessent said during a discussion at a New York Times event. The US central bank, founded more than a century ago, established a board of governors in Washington along with 12 district banks spread across the country. "Presidents at regional banks were supposed to be from their districts," Bessent argued, while now "there's this idea of ​​importing shiny, shiny objects." The Treasury chief reiterated a claim he made last week that the three current Fed presidents do not meet his criteria.

"So I'm going to start advocating going forward, not retroactively, that regional Fed presidents must have lived in their districts for at least three years," he said. This new rule could require congressional approval, or could be implemented by the Fed chairman and board, Bessent said.

Delayed Choice

Under the current structure, regional boards—excluding those working at financial institutions—nominate a president for their districts, with the Board of Governors voting to approve the appointment. The president serves a term that can also be reauthorized every five years, with the current term expiring in February. Bessent's proposal comes after current Atlanta Fed president Raphael Bostic said he would step down at the end of his term.

Bessent indicated that the Fed board could "simply say, unless someone has lived in the district for three years, we're going to veto them." Some of the most vocal figures on the Fed's current policy-making committee are regional Fed presidents, including Dallas Fed President Lorie Logan, Kansas City Fed President Jeff Schmid, and Cleveland Fed President Beth Hammack.

Last week, Bessent called for a broader simplification of the Fed's operations, saying in a CNBC interview that the central bank had become too complex in how it manages money markets.

On Wednesday, he reiterated that the Fed has migrated from a "monetary interest rate function" to a "balance sheet function, which I can tell you nobody understands."

At the same time, Bessent stated that he still sees the Fed's role as using its balance sheet as a tool in some cases. Policymakers during the financial crisis, and again after the Covid-19 pandemic, turned to large-scale asset purchases to maintain financial liquidity and suppress long-term borrowing costs. In the event of "some kind of financial instability" or an economic downturn, one available response is for the Fed to "loosen monetary conditions, perhaps dipping into the balance sheet," Bessent said.

The comments came while discussing what he said were his concerns about the rapid growth of private credit firms in lending to businesses.

"My concern is that in a downturn, it can be very pro-cyclical," he said of private credit. Investors "always panic at the bottom," he said.

Conversely, Bessent said that for regulated financial institutions, the Treasury Department, the Fed, and other regulators could provide a "window of guidance" to ease lending—something that would counteract the downturn.

The Treasury chief reiterated his view that private credit growth is a symptom of excessive bank regulation. "We've been working with regulators to create more credit in the regulated banking system," he said. (alg)

Source: Bloomberg