The U.S. House of Representatives is reportedly going to vote on new legislation including auditing reforms for the Federal Reserve.
The Federal Reserve Reform and Modernization Act isn’t “just about accounting,” however. It would change the process by which the Federal Reserve formulates and communicates monetary policy. Its sponsors advocate that the Fed adopt a more “rule-like” approach, as opposed to what they criticize as discretionary authority, by announcing a benchmark rule and reporting on how its policy choices measure up to that rule.
The bill isn’t “just about monetary policy,” either. There are important provisions relating to the Fed’s supervision and regulation of banks and the financial system, which advocates argue would improve the transparency of the Fed’s oversight as well as its negotiations with other countries and international organizations. These international negotiations include negotiations over bank capital regulation, a good government accounting topic if there ever was one.
Importantly, in our neck of the woods, the bill would lift some current restrictions on the ability of the Government Accountability Office (GAO) to audit the Federal Reserve, including restrictions relating to the “conduct of monetary policy” by the Federal Reserve Board of Governors. The Fed has long stressed that these restrictions help bolster the independence of the Fed in its monetary policy, and for the good. Some critics are concerned about the restrictions, pointing to the quality of Fed forecasting and its role in the development of policy. Some critics also call for an audit of open market operations in the “conduct of monetary policy” in light of the massive Fed buying of securities from large financial institutions in recent years. However, it is not entirely clear from the text of the bill whether that could include an audit of transactions in the Federal Reserve Banks, mainly the Federal Reserve Bank of New York.
A summary of the bill from its sponsors in the House is here. The full current text of the legislation is here.