The chairman of the House Banking, Finance and Urban Affairs Committee is accusing the Federal Reserve Board of meddling in U.S. foreign policy by participating in a new trilateral commission designed to stabilize Mexico's currency.
Rep. Henry B. Gonzalez (D-Tex.), the Fed's fiercest critic in Congress, said the agency's participation in the new commission formed by the United States, Canada and Mexico raises troubling questions about the ability of an independent regulatory body to influence foreign policy when it is subject to little congressional supervision.
In late April, the Fed agreed with the Treasury Department to enter into a currency exchange accord with Mexico and Canada. The Fed and Treasury will spend $3 billion each to support the commission, which is an outgrowth of the North American Free Trade Agreement.
The currency exchange pact is intended to minimize fluctuations between the dollar and the peso, now that the U.S. and Mexican economies are about to become closely intertwined under NAFTA.
Gonzalez said the swap amounts to a "subsidy to Mexico" and that the Fed is putting $3 billion of taxpayer money into the deal with no congressional oversight. Gonzalez said the currency arrangement will enable the Fed to help support the Mexican government in times of crisis, and thus will be able to influence foreign policy without having to consult Congress.
"In truth, this is a loan of U.S. dollars to Mexico," Gonzalez said.
Fed officials said the central bank has been involved in similar international currency swaps since 1962 and that they have become routine business.
In its foreign exchange activities, the Fed influences currency rates by spending dollars to buy and sell other currencies. The actions are usually designed to reduce volatility in currency markets or reduce the impact on international financial institutions from another country's currency problems.
On Monday, Gonzalez introduced legislation that would force both the Fed and the Treasury Department to make more thorough public disclosure of policies designed to influence international currency markets, "interventions which sometimes mean putting billions of dollars of taxpayers' money at stake," he said.
Under the measure, the Fed chairman would be required to testify before Congress about exchange rate policies and the Treasury secretary would have to notify Congress within 24 hours of each time the Fed and Treasury intervened in foreign exchange.