U.S. Treasury Secretary Janet Yellen plans to promote reforms at the Federal Reserve, proposing a residency term for regional Federal Reserve Bank presidents, and warning about risks in private credit

U.S. Treasury Secretary Scott Bessent stated on Wednesday that he will push for a new rule requiring candidates for regional Federal Reserve Bank presidents to have resided in the district for at least three years.

Bessent is seeking a major reform of the Federal Reserve, having repeatedly accused it of overstepping its bounds and straying from its core mission of formulating monetary policy. During a discussion at an event, Bessent said:

I do believe we have strayed from the original design of the system. Regional Federal Reserve presidents should come from the region, but now the Fed is focused on bringing in flashy outsiders.

Bessent reiterated a point he made last week that currently three regional Federal Reserve presidents do not meet the new standard he proposed. Bessent stated, "I will begin to push for a new rule requiring that in the future, regional Federal Reserve presidents must have resided in the district for at least three years. This new rule may require Congressional approval, or it could be implemented directly by the Fed Chair and the Board."

Under the current system, regional Federal Reserve presidents are nominated by the boards of the local Federal Reserves (excluding directors who serve in financial institutions) and must be approved by a vote of the Federal Reserve Board. The term for regional Federal Reserve presidents is five years, with re-confirmation required every five years; the current term will expire in February. The current president of the Atlanta Federal Reserve, Raphael Bostic, has indicated he will step down at the end of his term.

Bessent hinted that the Federal Reserve Board could directly state: if a candidate has not resided in the district for at least three years, we will refuse to approve their nomination.

When discussing private credit, Bessent stated, "I am concerned that this type of credit will exhibit strong pro-cyclical behavior during economic downturns. Investors always panic when the market hits bottom." In contrast, Bessent pointed out that within the regulated financial institution system, the Treasury, the Fed, and other regulatory agencies can alleviate credit contraction by providing "window guidance," thereby hedging against economic downturns.

Bessent again emphasized that he believes the rapid growth of private credit is a result of "over-regulation" of the banking system. "We have been working with regulators to create more credit space within the regulated banking system."