The Fed Strikes Back

Despite have a ton of cosponsors, Ron Paul’s bid to get a full audit of the Fed seems have died in the Senate. Vice Chairman Donald Kohn took on the issue today on Capitol Hill:

The Congress, however, has purposefully–and for good reason–excluded from the scope of potential GAO audits monetary policy deliberations and operations, including open market and discount window operations, and transactions with or for foreign central banks, foreign governments, and public international financing organizations. By excluding these areas, the Congress has carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining the independence of the central bank’s monetary policy functions and avoiding disruption to the nation’s foreign and international relationships.
The same public policy reasons that supported the creation of these exclusions in 1978 remain valid today. The Federal Reserve strongly believes that removing the statutory limits on GAO audits of monetary policy matters would be contrary to the public interest by tending to undermine the independence and efficacy of monetary policy in several ways. First, the GAO serves as the investigative arm of the Congress and, by law, must conduct an investigation and prepare a report whenever requested by the House or Senate or a committee with jurisdiction of either body. Through its investigations and audits, the GAO typically makes its own judgments about policy actions and the manner in which they are implemented, as well as recommendations to the audited agency and to the Congress for changes or future actions. Accordingly, financial markets likely would see the grant of audit authority with respect to monetary policy to the GAO as undermining monetary independence–with the adverse consequences discussed previously–particularly because GAO audits, or the threat of a GAO audit, could be used to try to influence monetary policy decisions.
Permitting GAO audits of monetary policy also could cast a chill on monetary policy deliberations through another channel. Although Federal Reserve officials regularly explain the rationale for their policy decisions in public venues, the process of vetting ideas and proposals, many of which are never incorporated into policy decisions, could suffer from the threat of public disclosure. If policymakers believed that GAO audits would result in published analyses of their policy discussions, they might be less willing to engage in the unfettered and wide-ranging internal debates that are essential to identifying the best possible policy options. Moreover, the publication of the results of GAO audits related to monetary policy actions and deliberations could complicate and interfere with the communication of the FOMC’s intentions regarding monetary policy to financial markets and the public more broadly. Households, firms, and financial market participants might be uncertain about the implications of the GAO’s findings for future decisions of the FOMC, thereby increasing market volatility and weakening the ability of monetary policy actions to achieve their desired effects.
These concerns extend to the policy decisions to implement the discount window and broadly available credit facilities. These facilities are extensions of our responsibility for promoting financial stability, maximum employment and price stability. Indeed, unlike the institution-specific loans that the Federal Reserve has made that now are subject to GAO audit, these broader market facilities are designed to unfreeze financial markets and lower interest rate spreads in concert with our other monetary policy actions. It is important that, like other monetary policy decisions, the Federal Reserve remain independent in making policy decisions regarding these facilities.
An additional concern is that permitting GAO audits of the broad liquidity facilities the Federal Reserve uses to affect credit conditions could reduce the effectiveness of these facilities in helping promote financial stability, maximum employment, and price stability. For example, even if strong confidentiality restrictions were established, individual banks might be more reluctant to borrow from the discount window if they knew that their identity and other sensitive information about their borrowings could be disclosed to the GAO. Rumors that a bank may have used the discount window can cause a damaging loss of confidence even to a fundamentally sound institution. Experience, including experience in the current financial crisis, shows that banks’ unwillingness to use the discount window can result in high and volatile short-term interest rates and limit the effectiveness of the discount window as a tool to enhance financial stability.
Overall, the Federal Reserve believes that removing the remaining statutory limits on GAO audits of monetary policy and discount window functions would tend to undermine public and investor confidence in monetary policy by raising concerns that monetary policy judgments in pursuit of our legislated objectives would become subject to political considerations. As a result, such an action would increase inflation fears and market interest rates and, ultimately, damage economic stability and job creation.

Posted by on July 9th, 2009 at 1:49 pm


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