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If Anyone Needs an Audit, It’s the Federal Reserve

February 3, 2015 in Economics

By Mark A. Calabria

Mark A. Calabria

Last week Sen. Rand Paul (R-Ky.) introduced S. 264, a bill to audit the Federal Reserve, while on day one of the new Congress Rep. Thomas Massie (R-Ky.) offered similar legislation, H.R. 24, in the House.  With Sen. Mitch McConnell (R-ky.) as Majority Leader, the prospects of the bill going to the White House are pretty strong.

But auditing the Fed is a topic of bitter debate. Not along party lines, instead pitting government transparency advocates against proponents of Federal Reserve political “independence.” So what is “Audit the Fed” really about?

First of all, yes the Fed is currently subject to a financial audit.  But that’s not what this is about.  In this context, audit means program evaluation.  There are four short provisions under current law that restrict the Government Accountability Office (GAO) from auditing anything related to monetary policy at the Federal Reserve. That includes the deliberations of the Fed’s monetary policy-setting body, the Federal Open Market Committee (FOMC), the communications of the FOMC to enact the policy decided upon, and the actual transactions conducted by the New York Fed to carry out the policy.

An on-going GAO audit of the Federal Reserve’s monetary functions is one avenue that could aid that effort or at least help Congress, and the public, more fully understand the actions of the Fed.”

The two “Audit the Fed” bills repeal those four restrictions and ask GAO to complete what is more a programmatic audit than a financial audit and report to Congress on what they find.

When the restrictions were originally added in the 1970s, GAO testified before Congress saying, with regard to the provisions, “[w]e do not see how we can satisfactorily audit the Federal Reserve System without authority to examine the largest single category of financial transactions and assets that it has.”

GAO exists for the very simple reason that no one member of Congress, or their staff, fully understands the functioning of the various government agencies. GAO exists to inform.   As someone who previously staffed the Senate Banking Committee, let me say there are few areas less understood by Congress than monetary policy and macroeconomics. Hence there are few areas more in need of a GAO audit than the Fed.

Subjecting the Federal Reserve’s monetary policy function to a GAO audit in order to educate Congress does not subject the Fed to “short-run political interference” as Fed Chairwoman Janet Yellen suggests. Such …read more

Source: OP-EDS

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