Federal Reserve Chairwoman Janet Yellen invoked the Great Inflation of the 1960s and 1970s in pushing back Tuesday against a congressional proposal to subject the central bank to an audit of its monetary policy.
That ugly episode, in which inflation soared into the double digits and pushed up interest rates, was one of the biggest black marks in the Fed’s 102-year history. Yellen blamed it on pressure from Congress, which she said would follow legislation to audit monetary policy proposed by Sen. Rand Paul, R-Ky.
“I would remind you that in the early ’70s, when inflation built and became an endemic problem in the U.S. economy, history suggests that there was a political pressure on the Fed that interfered with its decision-making,” Yellen told lawmakers Tuesday.
In 1978, Congress shielded Fed monetary policy meetings from audits by the Government Accountability Office. Without that provision, Yellen said, “I really wonder whether or not the Volcker Fed would have had the courage to take the hard decisions that were necessary to bring down inflation and get that finally under control,” referring to former Fed Chairman Paul Volcker, who is generally credited for ending runaway U.S. inflation in the early 1980s by tightening monetary policy in the face of widespread criticism and a recession.
Yellen clearly came to Tuesday’s Senate hearing on monetary policy prepared to answer questions about the Fed audit legislation, which Paul has been pushing hard and has received indications of support from Republican leadership.
She brought with her a copy of the accounting firm Deloitte and Touche’s outside audit of the Fed’s finances to underscore the point that the central bank’s books are transparent.
In addition to the outside audit, which is commissioned by its inspector general, the Fed also has most of its lending and bailout powers audited by the Government Accountability Office.
When it comes to monetary policy meetings, however, the Fed’s deliberations are shielded from public view at the time they occur. Fed members need that space to discuss possibilities and alternatives for setting interest rates and changing the size of the independent central bank’s balance sheet without fear of political interference, Yellen said.
“I want to be completely clear that I strongly oppose audit the Fed,” Yellen said. The bill “would politicize monetary policy, would bring short-term political pressures to bear on the Fed,” she added.
Yellen has made similar comments in past appearances on Capitol Hill, where many lawmakers, especially Republicans, remain skeptical of the Fed’s maintenance of zero short-term interest rates and other efforts to stimulate the economy.
But she did receive support from one member of the Senate Banking Committee, namely Republican Bob Corker of Tennessee.
Corker cast doubt on Paul’s efforts, saying the Fed audit bill is “an attempt to allow Congress to be able to put pressure on Fed members relative to monetary policy.”
“I would just advocate that that would not be a particularly good idea and it would cause us to put off tough decisions for the future, like we currently are doing with budgetary matters,” Corker said.
The committee’s chairman, Sen. Richard Shelby of Alabama, has made comments supportive of some kind of additional audit of the Fed.
Shelby said at Tuesday’s hearing that he was interested in hearing whether Yellen “believes the Fed should be immune from any reform.”
