Leave the Fed Alone

Political rhetoric is warming as November nears, and the independence of the Federal Reserve is in the crosshairs. The Romney/Ryan ticket is calling for greater scrutiny and audits of the Fed. Congressman Ron Paul (R Texas) has called for audits that would essentially end the confidentiality of the Federal Reserve Open Market Committee’s deliberations. As moronic proposals go, this one ranks pretty high. Politicizing the short-term adjustments to monetary policy without regard to the long-term consequences of what is inherently a long-term process simply makes no sense.

“The Congress established maximum employment and stable prices as the key macroeconomic objectives for the Federal Reserve in its conduct of monetary policy. The Congress also structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes.” (federalreserve.gov) But now Congress wants to change their own rules.

The Government Accountability Office already audits the Fed’s operations, including monetary policy operations. Moreover, an independent auditor reviews the Fed’s financials and publishes its results annually. Information security is also audited. Unaudited, and at times unexplained, are the policy debates that drive policy.

The Ron Paul “Audit The Fed” bill would let any member of Congress request an audit after an FOMC meeting. This audit could be requested for any reason, but we presume it will normally ensue when any individual Congressperson does not like the outcome of the FOMC meeting. The GAO would then be sent on a fishing trip for briefing documents, transcripts and the like.

Monetary policy affects the economy and inflation with long and variable lags, so the kind of audits proposed by the Paul bill could not possibly be constructive or informative. This is a naked attempt to harass and intimidate, which can’t be good for the independence of monetary policy decision making. Its worth pointing out as well that the Fed is already accountable for its monetary policy decisions through reports to congress and related testimony, at which Member Of Congress can verbally harass the Chairman to their heart’s content.

Chairman Bernanke said, “… policymakers in a central bank subject to short-term political influence may face pressures to over-stimulate the economy to achieve short-term output and employment gains that exceed the economy’s underlying potential. Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind only inflationary pressures that worsen the economy’s longer-term prospects. Thus, political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation.”

You may or may not agree with the Federal Reserve’s use of Quantitative Easing, or Operation Twist, or the ‘extended period’ of near zero interest rates. But opening the process to a Congress that can’t produce a balanced budget proposal or agree on a strategy to avoid the national debt limit, and which chooses to postpone plans for dealing with the looming ‘fiscal cliff’ until after the election, is hardly a change that will promote long-term economic stability.