WASHINGTON — Federal Reserve Board Chairman Ben Bernanke on Wednesday warned lawmakers that a bill to expand Congress' authority to audit the central bank's monetary policy decisions would be a grave error.
Testifying before the House Financial Services Committee, Bernanke agreed somewhat with Rep. Ron Paul, R-Texas, the bill's author, on the necessity for strong transparency at the Fed. But he stopped short of backing the legislation, saying a mandated audit of the Fed's monetary policy deliberations and decisions would be a "mistake."
"I do feel it's a mistake to eliminate the exemption from monetary policy and deliberations which would effectively, at least to some extent, create a political influence or a political dampening effect on the Federal Reserve's policy decisions," said Bernanke in his second appearance on Capitol Hill this week to deliver his semiannual monetary policy report to Congress.
The Government Accountability Office has broad authority to audit all aspects of the Fed, but it does not examine discussions and policy actions undertaken by the Federal Open Market Committee. Paul's bill would wipe out that exemption and would in effect give Congress permission to ask the watchdog agency to review decisions by the Fed about interest rates.
"That is very concerning because there's a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer-term," said Bernanke. (The House is expected to vote on the bill next week.)
Bernanke said a "nightmare scenario" would involve a lawmaker trying to challenge a Fed chairman's raising the federal funds rate by asking the GAO to obtain all records, transcripts and preparatory materials related to the Fed's deliberations, in order to get independent opinion of whether or not it was the right decision.
"That would have a chilling effect and would prevent the Fed from operating on the apolitical, independent basis," said Bernanke.
But Paul dismissed that argument, saying it is just an excuse for not revealing the Fed's decision process to the public.
"When the Fed talks about independence what they're really talking about is secrecy, not transparency," said Paul.
Paul defended his bill, saying it had nothing to do with changing who is in charge of monetary policy.
"It's strictly a transparency bill," said Paul. "Monetary policy reform I believe will come, but that's another subject. This is just to know more about what the Federal Reserve is doing."
Bernanke argued the Fed, which is often thought of as a secretive agency, is in fact transparent and accountable about its monetary policy decisions. He said he agreed with Paul that it should be "thoroughly transparent, thoroughly accountable."
"I will work with everyone here to make sure that's the case," he said.
He said the Fed has already taken numerous steps to strengthen transparency, including releasing statements about its decisions, providing testimony to Congress and disclosing minutes of policy deliberations three weeks after each FOMC meeting.
"There's quite a bit of information provided to help Congress evaluate monetary policy as well as the public," said Bernanke.
He added that the Fed's balance sheet is thoroughly vetted and an independent external accounting firm audits its annual financial statement.
But Paul, who is not seeking another term, said it is still a big issue that the Fed is largely allowed to operate in secret, and too many in Congress appear unconcerned over the fact.
"Congress ought to get a backbone," he said. "They ought to say, 'We deserve to know, we have a right to know, we have an obligation to know because we have an obligation to defend our currency."
Bernanke conceded that Congress has the power to provide oversight over the Fed, but the central bank and its policy decisions should be kept away from politics.
"It is a well-established fact that an independent central bank will provide better outcomes," said Bernanke. "There's no constitutional reason why you couldn't — why Congress couldn't just take over monetary policy. If you want to do that, I guess that's your right to do it, but I'm advising that it wouldn't be very good from an economic point of view."