President Trump hasn’t minced words on his criticisms of the Federal Reserve. Now he has some backup from Congress’ bipartisan Government Accountability Office (GAO), which recently found that the Fed issued significant regulations without submitting them to the president or Congress for review, as required by law.
Nevertheless, the Fed is still trying to bypass both the president and Congress by rushing to implement its planned FedNow real-time payments system. FedNow will directly affect thousands of banks and credit unions, and will likely harm competing payment systems and compromise consumer privacy. Yet, the Fed has yet to submit its plans for review to either Congress or the president.
Jointly controlled by the Democratic House and the Republican Senate, the GAO perform audits of federal agencies, departments, bureaus, and boards at the request of members of Congress. On October 22, in response to queries by five senators—Thom Tillis (R-NC), Mike Crapo (R-ID), David Perdue (R-GA), Mike Rounds (R-SD), and Kevin Cramer (R-ND)—the GAO found that the Fed issued at least two “Supervision and Regulation letters” that violated the Congressional Review Act (CRA) by not being submitted to the president and Congress before they took effect.
Signed into law by President Clinton in 1996, the CRA deems any statement from a federal entity “designed to implement, interpret, or prescribe law or policy” as a “rule.” Under the CRA, such a “rule” must be submitted for cost analysis to the White House Office of Information and Regulatory Affairs (OIRA) to determine its economic impact, and then to Congress for further review. Congress then has 60 legislative days to overturn the rule through a majority vote in both houses and the president’s signature, or enough votes to override a presidential veto.
The GAO found that the Fed has been skirting CRA requirements by claiming that these letters—which dealt with seemingly technical capital requirements with a limited number of banks—did not have a broad enough impact on the banking industry. But the GAO found that the letters did have a “substantial impact on the regulated community.” Therefore, the letters were indeed “rules” under the CRA applied and must be submitted to OIRA and Congress.
If the GAO found that the CRA applied to these rules—one of which directly affected only eight banks—there is no question it applies to FedNow, which by Fed officials’ own telling will apply to virtually every bank in the country.
In an August announcement that the Fed was moving forward with FedNow, Fed Governor Lael Brainard, an Obama administration appointee, declared that the system would be “serving more than 10,000 banks of varying sizes and missions that are in communities all around the country.” Yet as Jack Kemp Foundation senior fellow Ike Brannon notes in Forbes, despite this broad impact on the regulated community, the Fed did not provide a cost-benefit analysis of the FedNow proposal, much less submit it to OIRA, as required by the CRA.
The CRA is not the only law governing agency review the Fed has chosen to ignore in implementing FedNow. The Fed is also flouting the Paperwork Reduction Act of 1995, which requires federal agencies to seek approval from OIRA before implementing policies that involve data collection. Under the law, the federal agency must also produce a statement containing, among other things, an analysis of “whether responses to the collection of information are voluntary, required to obtain a benefit, or mandatory.”
With FedNow, this is especially important given that the Fed has regulatory jurisdiction over much of the activities of the banks that would have to decide on whether to “voluntarily” participate in the FedNow program. This creates a blatant conflict of interest. As George Mason University law professor J.W. Verret notes, “The Fed regulates the payment systems with which it competes, and also regulates the customers.”
Now is the time for Congress and the Trump administration to bring accountability to FedNow.
Originally published at Forbes.
CEI Policy Analyst Matthew Adams and Research Associate Gibson Kirsch contributed to this article.