Fed's Powell Defends Agency Against 'Misguided' Audit Bills

WASHINGTON — Federal Reserve Board Gov. Jerome Powell defended the central bank Monday against congressional efforts to curb the central bank's monetary policy authority, saying the Fed navigated the financial crisis transparently and that such legislation would undermine the agency's independence.

"Congressional oversight of the Federal Reserve, including its conduct of monetary policy, is extensive, but no doubt could be improved in ways that do not threaten the Fed's effectiveness," Powell said. "These proposals are based on the assertion that the Federal Reserve operates in secrecy and was not accountable for its actions during the crisis, a perspective that is in violent conflict with the facts."

Speaking before the Catholic University of America, Powell addressed three separate initiatives being considered in Congress. The first, reintroduced last week by Sen. Rand Paul, R-Ky., would subject the central bank to policy audits by Congress. The second, introduced by Rep. Thomas Massie, R-Ky., would subject the Fed to reviews by the Government Accountability Office whenever its monetary policy deviates from a set logarithm. A third proposal Powell cited would limit the Fed's ability to provide liquidity in times of stress.

Powell called the interest in auditing the Fed "misguided," in no small part because it does not take into account how well the central bank operated in the most recent financial crisis in 2008. While the decision to lower interest rates to near-zero for an extended period and to buy assets was extraordinary, Powell said, it was also instrumental in ensuring that the effects of the crisis were not deeper and longer-lasting, and other central banks have begun to imitate those policies.

"Without these steps, the slump in the labor market and the broader economy surely would have been even deeper and more prolonged, and the low wage and price inflation we are still experiencing might have turned into outright deflation," Powell said. "Critics warned that these policies would unleash uncontrollable inflation, fail to stimulate demand, and court other known and unknown risks. The evidence so far is clear that the benefits of these policies have been substantial and that the risks have not materialized."

Powell went on to say the proposals he outlined would come with their own set of costs. For example, allowing the GAO to review monetary policy decisions — which are now exempt by law — would limit the Fed's latitude in making the kinds of decisions it made during the crisis by "inserting the Congress directly into monetary policy decision-making." This would come with little public benefit, because the Fed's actions are already subject to oversight by an independent Inspector General and are highly scrutinized by the public.

Powell is not the first member of the Fed system to criticize the "Audit the Fed" bills in Congress. Loretta Mester, president of the Federal Reserve Bank of Cleveland, told a conference in Columbus, Ohio, last week that the proposals are "misnamed and misguided"; misnamed, because the central bank is already subject to numerous financial audits, and misguided because "they really are about allowing political considerations to influence monetary policy decisions."  Fed Chair Janet Yellen has also criticized the effort.