Does the Federal Reserve Need to be Audited? (S. 264)

What is S. 264?

(Updated March 15, 2018)

This bill would direct the Comptroller General of the Government Accountability Office (GAO) to:

• Audit the Federal Reserve System's Board of Governors and the Federal Reserve Banks within 12 months of this bill’s enactment.

• Submit to Congress a detailed report of the audit’s findings and conclusions within 90 days of the audit’s completion.

The Federal Reserve system is in charge of controlling the U.S. money supply.

GAO would also report on and audit loan files from homeowners who were in foreclosure in 2009 or 2010 — a required part of enforcement actions taken by the Board against supervised financial institutions (i.e. banks that got bailed out).

The bill outlines that audits should include:

• Guidance and advice on how to follow procedure when doing file reviews from the Board to the independent consultants connected to supervised financial institutions.

• Factors that independent consultants should use when evaluating loan files and the results that come from those reviews.

• Conclusions made by those consultants about the nature and extent of financial injury to each foreclosed homeowner — plus types of remedies offered.

Past limitations on audits of the Federal Reserve would be repealed by this bill.

Argument in favor

The Federal Reserve system is a mystery to the majority of Americans, but it plays an absolutely integral role in the U.S. economy. An audit would shed some light on a veiled part of our banking system.

Argument opposed

Federal Reserve system already goes through audits, and it's making strides towards being more transparent. A Congressionally initiated audit will only cause more political influence on the Fed's actions.

Impact

GAO auditors, consultants, the Federal Reserve system, and Congress.

Cost of S. 264

A CBO cost estimate is unavailable.

Additional Info

In-Depth: The Chairwoman of the Federal Reserve — Janet Yellen — has fought attempts to audit and externally review how the Fed makes its decisions, for fear that it would “politicize monetary policy.” She has gone on record saying “I want to be completely clear, I strongly oppose Audit the Fed.”

Sponsoring Sen. Rand Paul (R-KY) disagrees, saying:

“A complete and thorough audit of the Fed will finally allow the American people to know exactly how their money is being spent by Washington. The Fed currently operates under a cloak of secrecy and it has gone on for too long. The American people have a right to know what the Federal Reserve is doing with our nation’s money supply.”

The Federal Reserve Board, the 12 Federal Reserve banks, and the Federal Reserve system as a whole are all subject to audits by the Government Accountability Office (GAO). The financial statements of the banks and the system in its entirety are audited by the Office of the Inspector General, which also investigates the Federal Reserve's operations. But current oversight has been deemed insufficient by some who want broader insight into the Federal Reserve's activities, despite fierce resistance.

Of Note: Since 1977 the Federal Reserve has operated under what is known as the 'dual mandate' which sets its goal as maximizing employment, while supporting stable prices (avoiding inflation), and maintaining moderate long-term interest rates.

In order to accomplish these goals, the Federal Reserve has three tools at its disposal:

• Open Market Operations, which directly affect the money supply, include the buying and selling of U.S. Treasury bonds to influence the interest rate up or down — whichever is more desirable given economic conditions. When the Federal Reserve buys bonds, the money supply grows and interest decreases. Conversely, when it sells bonds, the money supply shrinks and interest rates rise.
• Changes in the discount rate, i.e. the interest rate that Federal Reserve Banks charge depository institutions for short-term loans.
• Modifying the reserve requirements for depository institutions — which is the ratio of reserves to deposits those institutions are required to maintain in their vaults or on deposit at a Federal Reserve Bank.

In general, if the economy is growing rapidly and there are concerns about inflation rising to a level that erodes consumers purchasing power, the Federal Reserve might raise interest rates and shrink the money supply. It can also attempt to rein in the availability of credit through reserve requirements and the discount rate.

On the flip side, if the economy is in recession or sluggish, the Federal Reserve will attempt to broaden the money supply and lower interest rates to encourage economic growth. Meanwhile it can make credit more available to businesses and consumers by easing reserve requirements.

There are several areas where Federal Reserve critics express their concerns. Free-market activists disagree with Federal Reserve's role in managing the economy. They argue that its manipulations distort interest rates from the market's true equilibrium — leading to 'bubbles' and over-investment. They point to examples like the dot-com bubble or the subprime mortgage bubble.

Other critics point to policies that they say help fuel economic inequality — where the wealthy see their assets grow at a faster rate, while the average person's income remains stagnant. Former Federal Reserve Chairman, Ben Bernanke, isn't persuaded by those claims though — he believes that remedying inequality isn't an attainable goal of monetary policy (other than through job creation). He also foists the blame onto other long-term structural causes of economic inequality like globalization, demographics, and technological progress.

Media:

• Sponsoring Sen. Rand Paul (R-KY) Press Release
• New York Post
• FreedomWorks (In Favor)
• Washington Post (Opposed)
• The Hill (Context)
• Investopedia (Context)
  
• Federal Reserve Education (Context)
  

Summary by Eric Revell
(Photo Credit: Flickr user Boston Public Library)