U.S. Treasury Secretary Yellen plans to promote Federal Reserve reforms, proposes residency requirements for regional Fed presidents, and warns of risks in private credit.

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

Bessent is seeking a major overhaul of the Federal Reserve and has repeatedly accused it of overstepping its authority and straying from its primary mission of setting monetary policy. During a panel discussion, Bessent said:

I do think that it has already deviated from the original institutional design. Regional Fed presidents were supposed to be from their own regions, but today the Fed is focused on bringing in glamorous outsiders.

Bessent reiterated a point he made last week, namely that there are currently three regional Fed presidents who do not meet his proposed new standard. Bessent said: "I am going to start pushing for a new rule requiring future regional Fed presidents to have lived 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 of Governors."

Under the current system, regional Fed presidents are nominated by the boards of their respective regional banks (excluding directors who work for financial institutions), and are subject to approval by the Federal Reserve Board of Governors. The term of a regional Fed president is five years, with reconfirmation required every five years; the current term will expire in February. Current Atlanta Fed President Raphael Bostic has indicated he will step down at the end of his term.

Bessent suggested that the Fed Board of Governors could simply declare: If a candidate has not lived in the region for three years, we'll refuse to approve their nomination.

Speaking on private credit, Bessent said: “I worry that this type of credit exhibits strong procyclicality during economic downturns. Investors always panic when the market bottoms out.” In contrast, Bessent pointed out, within the regulated financial system, the Treasury Department, Federal Reserve, and other regulators can use "window guidance" to ease credit contraction, thus offsetting downward economic cycles.

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

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