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Originally published Wednesday, January 20, 2010 at 7:08 AM

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NY Fed President backs independent central bank

The head of the Federal Reserve Bank of New York said Wednesday that the nation's central bank must be allowed to operate independently and free of increased oversight by Congress.

AP Business Writer

NEW YORK —

The head of the Federal Reserve Bank of New York said Wednesday that the nation's central bank must be allowed to operate independently and free of increased oversight by Congress.

William Dudley became president and CEO of the New York Fed when Timothy Geithner was named Treasury secretary. On Wednesday, he employed some of the same language used to describe recent lapses in airline security to warn against stripping the Fed of oversight.

Dividing oversight of banks between several government agencies, as some have proposed, would lead to "communication breakdowns," and a "failure to connect the dots," Dudley said in a speech before the Partnership for New York City.

It is the same language that has been used to describe security lapses after a 23-year-old Nigerian man boarded a flight from Amsterdam to Detroit with an explosive in his pants on Dec. 25, despite numerous red flags.

There is an effort in the Senate to strip the Fed of some authority over banks. Critics say the Fed for years had failed to spot warning signs of a looming economic disaster.

But Dudley said proposals to audit the Fed's monetary policies would create larger problems for the economy.

"Politicized central banks generally do not have enviable records with regard to inflation, economic growth or currency stability," Dudley said.

He backed arguments by Fed Chairman Ben Bernanke, who has said depriving the central bank of essential information would prevent it from acting quickly, as it did to head off a complete economic collapse.

The argument against greater Congressional involvement in bank oversight is not about maintaining power or turf, "but rather how we as a nation can best ensure that we never again relive the events of the past few years," Dudley said.

In a panel discussion after the speech, Dudley said that he understands public outrage over huge bonuses for bankers, and that the Fed was working to prevent excessive risk-taking on Wall Street.

Dudley is vice chairman of the Federal Open Market Committee, which sets interest rates.

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