By Howard Schneider
WASHINGTON (Reuters) -The Federal Reserve lacks adequate systems to counter a "malign" effort by China to gather inside information on the U.S. economy and monetary policy, according to a report that was prepared by Republican staff of the Senate Homeland Security Committee.
Fed Chair Jerome Powell promptly rejected the report, which was released on Tuesday, in a letter to outgoing Sen. Rob Portman, the ranking Republican on the committee.
"Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls and technology are robust and updated regularly," Powell wrote. "We respectfully reject any suggestions to the contrary."
On Wednesday, a Chinese foreign ministry spokesman branded the report "a political lie with no basis in fact."
The report's content relied heavily on information provided by the U.S. central bank itself, dating back to a 2015 internal probe of what came to be known as the "P-Network" - a group of 13 people at eight regional Fed banks whose patterns of "foreign travel, emails, details in curricula vitae, and academic backgrounds" raised concerns.
The Fed's Washington-based Board of Governors and 12 quasi-independent regional banks employ thousands of economists, including many from other countries, China among them. That collaborative approach, the committee report agreed, enhances the Fed's ability to understand the economy and make policy.
The incidents cited in the document, rather than intellectual collaboration, pointed to "a sustained effort by China, over more than a decade, to gain influence over the Federal Reserve," according to the report.
It is unclear what came of it. The committee report provided detailed case studies of five individuals, four of whom continue as Fed employees, and said that, despite their connections with Chinese officials and universities, the Fed found no instances where information had been shared in violation of policies.
Powell wrote that he had "strong concerns about assertions and implications in the report," and detailed the background checks Fed staff undergo, and the technology used to prevent security breaches.
"We would be concerned about any supportable allegation of wrongdoing, whatever the source," Powell wrote. "In contrast, we are deeply troubled by what we believe to be the report's unfair, unsubstantiated, and unverified insinuations about particular individual staff members."
Chinese foreign ministry spokesperson Zhao Lijian said that the report was "maliciously concocted by a handful of Republican lawmakers and is a political lie with no basis in fact."