Fed’s Alvarez Defends Federal Reserve’s Independence

The Federal Reserve faces pressure from lawmakers Friday as the House Financial Services Committee considers a bill that would require full audit of the Fed by the Government Accountability Office (GAO). Supporters of HR 1207, called the Federal Reserve Transparency Act of 2009, including committee chairman Barney Frank (D-Mass.) say there is an element of concealment regarding the Fed’s transactions. Opponents raise concerns that a full GAO audit to reveal those details would bring the Fed into the legislative process and compromise its independent monetary policy decisions. The bill’s sponsor, Rep. Ron Paul (R-Texas), said in opening statements for the hearing Friday a GAO audit would not affect policy decisions but instead implement more transparency at the Fed. Scott Alvarez, general counsel of the Board of Governors of the Federal Reserve System, tells the committee in prepared remarks that the Fed is already accountable to Congress and the public. It additionally further strengthened its ongoing commitment to transparency, routinely testifies before Congress and regularly publishes annual audits of the Fed’s financial statements. “We recognize that these programs must be accompanied by additional transparency so that the Congress and the public can be assured that we are exercising the best possible stewardship of the resources and responsibilities that have been entrusted to us,” Alvarez says in prepared remarks. “For these reasons, we have substantially increased both the type and amount of information that we disclose concerning our liquidity and asset purchase programs.” For example, he notes the Fed publishes its weekly balance sheet as well as a monthly report on liquidity programs. HousingWire‘s Linda Lowell agrees that, except for a detailed list of the programs’ actual transactions including dates, amounts and names of counterparties names, “the Fed is quite forthcoming about its activities.” The Fed must act in independence from legislative pressure, Alvarez says at the hearing. He warns GAO audits of monetary policy may second-guess the Fed’s policy judgments and attempt to influence subsequent monetary policy decisions. He indicates in prepared testimony the bill would “cast a chill” on policy talks if policy-makers anticipate GAO audits to push early publication and analysis of policy decisions. The broader market facilities are necessary to unfreeze credit markets and the GAO audits may impede these facilities, he adds. Banks’ unwillingness to use the discount window, for example, can result in high and volatile short-term interest rates. “Permitting GAO audits of discount window lending and the broad liquidity facilities that the Federal Reserve uses to affect credit conditions generally could reduce the effectiveness of these facilities in promoting financial stability, maximum employment, and price stability,” Alvarez says in prepared remarks. When asked by committee members what types of information about monetary policy would be “damaging” if revealed, he indicated no specific types of information are of concern. Instead, he reiterated the participation of the GAO would second-guess the Fed’s monetary policy decisions. But economist Thomas Woods, Jr. of the Ludwig von Mises Institute, will deliver testimony that supports the bill and makes an argument against the idea that a GAO audit would have any influence on increasing money supply, determining interest-rate targets or adopting any other policies. The bill “seeks nothing more than to open the Fed’s books to public scrutiny,” Woods writes in prepared statements. “Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.” The Fed, contrary to “conventional wisdom” that the monetary system is sound, is not adequately audited, according to Woods. His testimony says: “My point is simply this: if our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance?  How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?” The bill is being considered amid ongoing hearings over financial regulatory reform. Former chairman of the Board of Governors of the Federal Reserve System Paul Volcker on Thursday defended the Fed’s “natural function” and suggested the Fed should play a significant role in surveying the overall financial system. Write to Diana Golobay.

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