Fed needs both independence and better accountability
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The following editorial appears on Bloomberg View:
When Janet Yellen comes before the Senate Banking Committee on Nov. 14, the roadblock to her confirmation as Federal Reserve chairman will have little to do with her economic expertise. It will be how much she thinks the Fed should be treated differently from other government agencies.
Should the Fed's interest-rate deliberations be subject to congressional audits? Do lawmakers have a right to know which banks have borrowed from the Fed's discount window? Can the Fed be called accountable if Congress and the executive branch don't know much of what goes on inside the monetary-policy temple?
This line of questioning will come largely from Sen. Rand Paul, the Kentucky Republican pushing legislation that would subject the Fed to audits (a cause his father, Ron Paul, long championed). The senator says he'll try to delay Yellen's confirmation until his measure gets a vote.
Yellen will be confirmed regardless, as even Paul concedes. Yet the senator has a point. The Fed's accountability and transparency could stand some improvement. In 2012, 327 House members, including 89 Democrats, voted for his father's bill. It got less traction in the Senate — only 33 senators backed it — yet Majority Leader Harry Reid had complained in 1995 on the Senate floor about the lack of interest in mandatory Fed audits "even though there is no entity in the world that controls our lives more."
How right he was. At the same time, the Fed really is special by design. It is meant to be a hybrid agency. It owes its existence to a congressional charter directing it to secure maximum employment and stable prices — yet it gets no money through congressional appropriations, and its policies aren't subject to White House approval. Its interest-rate deliberations aren't audited, but its financial statements are. It publishes minutes of internal discussions, but three weeks after the Federal Open Market Committee has met (and even then no names are attached). Verbatim transcripts are released eventually — five years after the fact. A model of transparency it isn't.
Yet caution is in order. Congress would be wrong to undermine the Fed's independence in setting monetary policy. It was this very freedom that let the Fed use unorthodox means — an enormous bond-buying program known as quantitative easing — to stimulate the economy when it rightly judged this necessary. This policy aroused fierce opposition from Republicans; in different circumstances, raising interest rates to stem inflation has met strong opposition from Democrats. Like any central bank, the Fed needs a measure of independence from politics to do its job. The question is: How much independence is enough?
Audits might seem uncontroversial — there's a danger, however, that they'll be used not to cast light on the Fed's activities but to harass the institution and pressure its governors to change policy against their better judgment. In a recent University of Chicago poll, not one of 36 prominent economists agreed that Government Accountability Office audits of monetary policy would improve the Fed's legitimacy without also hurting its decision-making.
Even so, part of the reason Congress mistrusts the Fed is that the central bank can be needlessly secretive. The outgoing chairman, Ben Bernanke, has tried to demystify its decisions by holding regular news conferences after FOMC meetings. The Fed could do more.
For example, it could disclose to selected lawmakers when banks, facing a temporary shortage of cash, borrow from the discount window. The Dodd-Frank Act mandated public disclosure after two years, but letting members of the House and Senate banking panels know at once when a bank may be teetering — similar to the closed-door briefings intelligence agencies provide on sensitive issues of national security — seems reasonable.
The Fed could also provide more information about its emergency initiatives. From August 2007 to April 2010, the Fed secretly administered the largest bailout in U.S. history without approval or oversight from Congress. The Fed's guarantees and lending limits totaled $7.77 trillion in 2009 — more than half the gross domestic product that year. The banks' dire straits weren't fully known until after the Dodd-Frank Act had passed, depriving lawmakers of facts they needed to draft the law well.
Helping the public to be better informed about its rule- writing is a third possibility. Dozens of Dodd-Frank provisions could affect the livelihoods of millions, but the Fed's thinking is murky. Public glimpses come almost exclusively from official testimony or formal disclosures that only banks and bank lobbyists understand. Often, the result is rules that lack the credibility and endurance that would come from being hammered out in public.
Balancing Fed accountability and independence isn't easy. The Fed must be free to set monetary policy without political interference, but Yellen ought to agree that a little more accountability needn't interfere with that.