By Rachel Brody |
The Federal Reserve has long been viewed as the most independent and steady of the federal bureaucracies; the gold standard, if you will, of bureaucratic operations. However, observers today have cause to question that reputation and many are.
The Fed's role today is as important as it has ever been. That's why its departure from past traditions is so troubling. Some have taken issue with how the Fed has approached monetary policy and others with how it has handled regulatory efforts. Whatever the issue the source of the complaint is the same: the steady hand and fact-based approach once revered has been replaced with something else that evokes considerably less confidence.
The Fed's recent debit card swipe fee reform rulemaking is a perfect example of how the once apolitical data-driven Fed is no longer beyond influence.
Swipe fee reform was intended to fix the broken debit market, a move that will help Main Street merchants and their customers. The fees, which are centrally set by Visa and MasterCard and collected by big banks every time a debit card is swiped, cost merchants and consumers $20 billion each year.
Swipe fee reform required the Federal Reserve to determine if the fees banks and debit card networks charge merchants were "reasonable and proportional" to the cost of processing debit card transaction. If they were found not to be, the Fed was instructed to determine a rate that was.
In December the Federal Reserve found that the average swipe fee paid by merchants was 44 cents despite costing the banks and networks a total of just 4 cents to process. As a result last December the Fed proposed capping these fees between 7 and 12 cents. Right on queue the banks crowed, they spent millions on lobbyists and advertising and predicted a doomsday outcome. When the final rule emerged this summer, the rate had more than doubled to 22 cents, eroding some of the intended benefits of the reforms. This remarkable about face was not the result of new data, no new findings of fact, no new direction from Congress, just the intense pressure of bank whining.
Retailers panned this outcome, banks applauded it, but the process should concern everyone. The once steady Fed is now quite malleable, bending to appeal to those it's tasked with regulating. The Federal Reserve is best when it is as it once was, steady and independent, a far cry from what it is today.
Corrected on 10/24/11: An earlier version of this article misstated the yearly cost of swipe fees for merchants and consumers. Merchants and consumers pay $20 billion in swipe fees each year.
Corrected on : Corrected on 10/24/11: An earlier version of this article misstated the yearly cost of swipe fees for merchants and consumers. Merchants and consumers pay $20 billion in swipe fees each year.
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