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Auditing the Federal Reserve

August 26, 2018

The Federal Reserve, or Fed, is responsible for overseeing the 12 regional Federal Reserve Banks and administering monetary policy. Founded by Congress in 1913 in response to the panic run on banks of 1907, the Fed is a semi-public institution charged with ensuring low unemployment, stabilizing prices by controlling inflation, and moderating long-term interest rates. Ideally speaking, it accomplishes these goals by controlling the size and growth rate of our money supply, that is by buying and selling Treasury securities which is sometimes referred to as “printing money.”

The Federal Reserve’s Board of Governors is comprised of seven presidentially-appointed members serving 14 year terms. It is considered a semi-public institution because it is an arm of the federal government, but each of its governors is expected to act independently without interference from political interests. In an effort to preserve this independence, the Fed was designed to fund itself through investments, which netted around $100 billion in 2015, the majority of which was deposited into the Treasury to pay the government’s bills.

The Fed’s role in our economy has expanded over the years in response to catastrophic events such as the Great Depression of the 1930s and the Great Recession of the 2000s, but its transparency measures, unfortunately, have not. This is why I, along with many Americans, support action by Congress to mandate auditing the Fed on an annual basis. Financial markets function most efficiently when information is both timely and accurate. Large swings in the stock market, for example, are commonly attributed to surprises such as unexpectedly bad – or good –earnings announcements or unforeseen action by an increasingly activist Fed.

We know the Fed currently owns around $4.5 trillion in assets, but because no routine audit mechanism exists, we have no idea what they are and the Fed chairman is not required to disclose them in testimony to Congress. I have cosponsored the Federal Reserve Transparency Act every Congress since it was first introduced, including in 2012 and 2014 when it passed the House as standalone legislation, and in 2016 when it passed the House as part of a broader package of Fed reforms. Unfortunately, the Senate has not yet passed a similar bill. Annual audits would provide this backward looking transparency while preserving its entitlement to private deliberation. With that said, changes to the Fed should be carefully considered with special consideration given to preserving and increasing its absolute independence from political interests.

Many people believe the Fed’s easy money policies were at least partially to blame for the severity of the financial crisis of 2008. There were early indicators of a housing bubble, but the market was not allowed to provide the necessary feedback mechanisms to stem investment into toxic assets. Instead, the Fed continued to pump “cheap” money at artificially low interest rates well beyond the point at which the market should have contracted making its eventual contraction an outright crash.

Increased transparency into the Fed’s decisions and asset ownership would not only provide additional information to stabilize markets, but also discourage actions based on ulterior motives, political or otherwise. The American people and their duly elected representatives in Congress have every right to know the inner workings of their government. Auditing the Fed on an annual basis would be a great step in that direction.

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