Paul’s Fed audit would strike what Yellen most wants to protect

But Federal Reserve Chairwoman Janet Yellen will fiercely defend the central bank’s freedom to set interest rates and conduct monetary policy without congressional oversight, which Paul’s legislation seeks to accomplish.

The Kentucky Republican this week reintroduced his bill to require the Government Accountability Office to perform a comprehensive audit of the Federal Reserve and report on it to Congress.

The bill has 30 co-sponsors, ranging from the Establishment in Majority Leader Mitch McConnell of Kentucky to the grassroots in Ted Cruz of Texas. It also has support from liberals critical of the nexus between Washington and Wall Street.

While officials at the Fed and monetary policy experts generally strongly recommend against it, the vast majority of the public favor opening up the central bank’s books.

A 2013 Rasmussen poll, for instance, found that nearly three-quarters of respondents favor auditing the Fed and releasing the results to the public. Just 10 percent disagree. A 2012 Reason-Rupe poll found similar results.

Anti-Fed sentiment has been elevated since the central bank helped bail out the financial industry in 2008 and then subsequently bought trillions of dollars of bonds to stimulate the economy.

“Enough is enough. The Federal Reserve needs to fully open its books so Congress and the American people can see what has been going on,” Cruz said in a comment representative of the populist rhetoric being employed against the Fed.

Paul’s legislation, the Federal Reserve Transparency Act of 2015, would open the books. The four-page bill would require the GAO to perform an audit of the Fed within a year, and then report on that audit to Congress. It also would repeal all existing legislation limiting such audits.

The Fed already faces several audits. Each year, an independent accountant hired by the Fed’s inspector general audits the central bank’s finances.

Under the 2010 Dodd-Frank reform law, the Fed is required to report on its dealings as the lender-of-last-resort to banks in a number of ways.

It must report any support extended under its emergency lending powers to Congress within seven days and update Congress each month afterward.

The GAO also has the authority to conduct on-site audits of the Federal Reserve Board of Governors, the 12 regional banks, and any shell companies set up by the Fed to extend emergency credit, and report to Congress and then the public on what they found.

Under another provision of Dodd-Frank, the Fed must disclose its emergency lending, including the borrowers, the amount loaned, and the terms, to the public on its website.

Dodd-Frank also provided for a one-time complete GAO audit of all of the Fed’s crisis-era lending that was completed in 2011.

The Fed also has increased the transparency surrounding its monetary policy decisions.

The minutes of each meeting of the Fed’s monetary policy committee are released three weeks after the meeting’s conclusion, then the transcript of the meeting are released five years later. The Fed chairman also holds quarterly press conferences following meetings, and the committee publishes its projections for the economy and interest rates.

The Fed also publishes information on the size and composition of its massive balance sheet each week.

Nevertheless, the Fed’s monetary policy committee meetings were shielded by law from GAO audit in 1978.

Asked to explain the main goal of his legislation, a spokesman for Paul simply referred to the statutory limitations on GAO audits of the Fed. Given the Dodd-Frank provisions on the Fed’s emergency lending, the main effect of Paul’s legislation would be to subject the Fed’s monetary policy meetings to a GAO audit. That would mean that the GAO’s examiners would sit in on the meetings and present its findings to Congress outside the Fed’s existing timeline for releasing minutes and transcripts.

In September, the House easily passed a bill to strip away the Fed’s protection against GAO audits. The measure passed on a bipartisan basis, by a vote of 333-92.

Yellen explained in December why she thought removing the limitations on GAO audits of monetary policy would be a mistake.

“I would say that the ability of a central bank to make the decisions about monetary policy that it regards as in the best longer-run interests of the economy, free of short-run political interference, is very important to the effective conduct of monetary policy,” she said at a press conference.

She obliquely referred to the history of the Fed in the 1960s and 1970s, when Fed chairmen allowed inflation to range into the double digits, often facing political pressure. “I think history shows not only in the United States, but around the world, that central bank independence promotes better economic performance,” Yellen said.