Former Federal Reserve Chairman Paul Volcker believes it is a "troublesome time" for the U.S. central bank as it becomes increasingly mired in political debates.
In an interview with Reuters TV's Impact Players, Mr. Volcker said the Federal Reserve itself has not become politicized, but he warned that Fed-bashing from critics in Congress could diminish confidence in the agency and hamper its effectiveness.
"It's terribly important that the Federal Reserve has the respect and confidence of the people because it has to do difficult things," Mr. Volcker said in an interview taped on Tuesday.
"Now it's doing expansionary things but some day it's going to have to do restraining, which is never popular. And if you have been too much in the political arena it becomes even more difficult, so this is a troublesome time for the Federal Reserve."
The Federal Reserve declined to comment on Mr. Volcker's statements.
While defending the Fed's need for independence, Mr. Volcker also said policy makers should review whether the central bank now bears too much of the burden for sweeping new oversight of Wall Street.
Congress, through the 2010 Dodd-Frank financial reform law, gave the Fed new authority to oversee a range of the largest and most complex U.S. financial institutions and charged it with carrying out a controversial curb on risky activity that has been named the Volcker Rule.
Mr. Volcker said the Fed's independence gives it a strong platform from which to oversee financial firms, but the U.S. still should review the way the regulatory system is organized as the new Dodd-Frank rules take effect.
"Is too much being centred in the Federal Reserve now? Should there be a different arrangement?" Mr. Volcker asked. "I'm not ready to take it away from the Federal Reserve entirely, but it deserves a look."
Mr. Volcker, who led the Fed under presidents Jimmy Carter and Ronald Reagan, battled political pressure during his own tenure with the agency as the Fed tried to tamp down inflation.
The Fed's actions under Mr. Volcker's tenure spurred massive protests, with farmers driving tractors outside the central bank's headquarters and one U.S. senator demanding that Mr. Volcker take his "boot off the neck of the economy."
Most of the recent backlash against the Fed has come from its drastic monetary policy actions designed to jolt the economy back to life after a devastating recession that unleashed stubbornly high unemployment rates.
Republicans have accused the Fed and its current Chairman Ben Bernanke of flooding the markets with cheap money, setting the stage for sharp inflation down the road.
The Republican-led House of Representatives in July passed legislation to subject the Federal Reserve's monetary policy to audits. While the measure has little hope in the Senate, Mr. Bernanke has said it would be a "nightmare" for Fed independence.
Mr. Volcker gained new post-financial-crisis notoriety after President Barack Obama asked Congress in January 2010 to tuck a proprietary trading ban advocated by Mr. Volcker into Dodd-Frank.
The so-called Volcker rule, which could cost Wall Street billions in profits, would stop banks that receive some sort of government support, such as deposit insurance, from betting with their own money.
Mr. Volcker says the controversy over the rule is partly fiction.
"I think the great mass of Wall Street is on my side, frankly," Mr. Volcker said. "I run into people all the time, including people in some of those big banks, that say: 'You're right."
He also said the Volcker rule's "surgical swipe" at speculative trading is a better approach to reining in huge financial institutions than calls to break up the big banks.
Sanford Weill, the former head of Citigroup Inc. and one of the chief proponents in the 1990s of allowing banks to do both commercial banking activity and investment banking, galvanized critics in July when he endorsed busting up the largest institutions.
Mr. Volcker said that view is too extreme.
"I'm a moderate fellow," he said.
Mr. Volcker also said backlash against financial reforms is indicative of a trend in U.S. politics in which the views of a few vocal critics with money for lobbying and campaign donations are amplified and come to outweigh other voices.
He blamed widespread lobbying and the influence of money in part for the failure of Congress and regulators to enact tougher rules for money market funds.
Money market funds invest in short-term debt and are widely seen as a safe alternative to bank deposits. But in 2008, one of the largest money funds "broke the buck," industry parlance for suffering such heavy losses that it could not maintain its $1-per-share price.
The U.S. government had to step in to end a spate of withdrawals from these funds. The U.S. Securities and Exchange Commission tightened some rules for the industry, but regulators said more reforms were needed.
The SEC attempted to come up with new rules this year, but SEC Chairman Mary Schapiro announced last month that she had failed to get enough support from her fellow commissioners to propose the new reforms.
"It's a reflection of the force that that industry, which is not a very big industry, has in the lobbying area," Mr. Volcker said. "There is a consensus, I've never seen anything like it, among all those regulatory agencies that reform is necessary."