Additional Fed Audits Will Not Threaten Monetary Policy

Congressman Ron Paul’s bill to audit the Federal Reserve, HR 1207, seems to have generated quite a bit of concern amongst the Fed that monetary policy would somehow be jeopardized by its passage. In recent congressional testimony, Fed Vice Chairman Donald Kohn stated that “permitting GAO audits of monetary policy also could cast a chill on monetary policy deliberations”, meaning that members of the Fed Open Market Committee (FOMC) and other committees might be more reluctant to openly discuss ideas in private if the actual discussions were subject to congressional scrutiny, and not just the final conclusions of the discussions such as target interest rates.

How justified are the Fed’s concerns? Would passage of HR 1207 somehow threaten the Fed’s independence with respect to conducting monetary policy? To begin with, the tools the Fed has at its disposal to conduct monetary policy, such as open-market operations, reserve requirements and the discount window, are codified in Title 12 of the U.S. Code, whereas HR 1207 would only amend Title 31 of the code. None of the legal provisions which authorize the Fed to conduct monetary policy would be altered in the slightest if HR 1207 is to be passed in its current form, and those provisions maintain a degree of independence for the Fed by not requiring its Board of Governors to obtain congressional approval for adjustments in the conduct of monetary policy.

But Mr. Kohn hinted that additional audits of the Fed might implicitly force its members to focus more on short-term gains, rather than on sound long-term monetary policy, without expressly changing the Fed’s legal authority to conduct monetary policy. In Mr. Kohn’s statements, he indicates that members of the FOMC might be reluctant to express ideas freely in private sessions, if those members are aware that their remarks might be later revealed to the GAO and the Congress, and that could have the effect of preventing meaningful ideas from being expressed which lead to sound policy. This is a most curious observation, since during the hearing Mr. Kohn acknowledged that the Fed is obligated to pursue the goals established for it by Congress. If members of the Fed are genuinely focused on those goals, should not their remarks in private sessions reflect those goals? Of course members might disagree on the best course of action to reach those goals, balancing short-term and long-term objectives, but given that the results of monetary policy are publicly announced and columnists from the Wall Street Journal and other publications frequently comment on the potential ramifications of the Fed’s actions, any member of the Fed who is qualified to hold such position should have to fortitude to stand by their remarks. By comparison, in addition to Supreme Court decisions being publicized, many opinions delivered by Supreme Court justices concerning its decisions have offered glimpses into how certain justices perceive the law, but those revelations have not threatened the Court’s independence.

It is more likely that the Fed is using concern over monetary policy as a distraction, to prevent the curious eyes of Congressman Paul from discovering which institutions the Federal Reserve has been bailing out through its emergency loan program. The Fed’s bailout program is not granted by the Congress in the Federal Reserve Act, and raises questions about how the Fed is conducting itself in all areas. While it is true that the central bank should have a measure of political independence to ensure long-term prosperity, Mr. Kohn failed to mention the effect HR 1207 would have in allowing Congress to discover which banks the Fed has been favoring – either he is somehow unaware of that implication, or the omission was deliberate. Furthermore, during his entire oratory about how the Fed has increased its transparency, Mr. Kohn apparently “forgot” about how certain senators have inquired to Fed Chairman Ben Bernanke concerning which banks have received the bailouts – with no response from Mr. Bernanke. Congressman Paul’s proposed bill would do nothing to remove the monetary policy tools available to the Fed under Title 12, and given concerns over the recent bailout activities it is prudent that the additional audits occur.