Campaign to audit Federal Reserve gathers pace


Sam Fleming and Barney Jopson
Financial Times, London
Monday, February 2, 2015

The US Federal Reserve is coming under the most political pressure it has faced since the financial crisis, as Republicans who say it lacks transparency attempt to subject its monetary policy deliberations to external audit.

Republicans who took control of both houses of Congress this year want to use their new power to push for laws that would expose the Fed’s rate-setting and quantitative easing policies to formal review.

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The Fed has long been a whipping boy of anti-government conservatives who dislike its power and perceived opacity. But interest in reforming the central bank is now spreading to the Republican establishment.

Janet Yellen, who chairs the US central bank, is likely to face questions on the topic this month in congressional testimony. Bill Huizenga, the Republican vice-chairman of the House subcommittee on monetary policy and trade, said the Fed was a "massive labyrinth of very opaque gears and levers" and that "very few people understand the why; the how."

He said: "There is this walled-off area -- this is a no fly-zone. In an open society when you are making significant decisions that impact a lot of people, why would we have this opaqueness on purpose?"

Last week, the conservative senators Rand Paul and Ted Cruz -- both 2016 presidential aspirants -- jointly introduced a bill to force the Fed to open its books.

Its co-sponsors include the Republican Senate majority leader Mitch McConnell, whose spokesman said: "The leader believes we should have more transparency."

Some Republicans are also renewing a longstanding push for the central bank to follow mechanical rules in setting monetary policy, drawing on the work of the economist John Taylor.

Some economists say this sort of constraint would be hazardous, with Paul Krugman, the Nobel prize-winning economist, writing last week that it was a "really terrible idea".

Ted Truman, a former Fed official and now a senior fellow at the Peterson Institute for International Economics in Washington, said the idea would remove "a substantial amount of the operational independence of the Federal Reserve". He said Ms Yellen could be forced to spend a lot of time debating the Republican reform proposals in the coming two years, even though any bill would probably be vetoed by President Barack Obama.

Ms Yellen said last year that she would "forcefully" oppose efforts to advance the "audit the Fed" legislation, saying it was important that her institution was free from short-term political interference.

Auditing the Fed was long the signature issue of Ron Paul, the libertarian former Republican presidential candidate and father of Rand Paul, who blamed the central bank for contributing to the financial crisis. But his lone campaign has now evolved into a broader populist movement.

Richard Shelby, who as chairman of the Senate banking committee controls which bills it sends for votes on the floor, told Bloomberg news agency last week that he was "very interested in some type of audited Fed, especially the portfolio".

"We should make sure that what they do, they’re doing right -- and there are a lot of questions about the portfolio of the Fed coming from [quantitative easing]," he said.

Democrats are opposed to the Republican push. Sherrod Brown, the top Democrat on the Senate banking committee, had supported previous initiatives to make the Fed more transparent, said a spokeswoman. "But he does not see how this [new Republican 'audit the Fed'] legislation will benefit working Americans, which he thinks should be a top priority of the Fed at this time."

However, the Fed's cause in Congress is being complicated amid discontent among Democrats over the performance of the New York Federal Reserve. In November, Jack Reed, a Rhode Island Democratic senator, introduced legislation that would require the New York Fed’s president to undergo a public confirmation process, including appointment by the president and approval by the Senate.

Calls to audit the Fed are jostling for the attention of Republican leaders with a host of issues, ranging from energy liberalisation to healthcare reform, now that the party controls both houses of Congress for the first time since 2006.

When Republicans in the House of Representatives advanced "audit the Fed" legislation last year, it was attacked by Maxine Waters, the senior Democrat on the House financial services committee, who said it would revoke the Fed’s independence, shake confidence in its decision-making and create unnecessary uncertainty in monetary policy.

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