WASHINGTON — Seeking to temper growing momentum around an effort to audit the Federal Reserve Board, House Financial Services Committee Chairman Barney Frank appeared Friday to be pushing a compromise that would require the central bank to disclose more information about its operations, but only after sufficient time passed to prevent spooking the markets.
At issue is a bill Rep. Ron Paul has been pushing since 1983 that would let the Government Accountability Office conduct a full audit of the Fed. The bill has gained momentum in the wake of the financial crisis, including attracting 295 co-sponsors — or nearly 68% of the full House.
Although the Fed opposes the bill in its current form, Frank and Scott Alvarez, the central bank's general counsel, appeared to find common ground during a hearing Friday on a way to narrow the scope of the legislation.
"Everything they do … ultimately it will be public, but you don't do it in a way that affects the market," Frank said during a break in the hearing. "We have not focused on the specifics yet. I believe we have conceptual agreement."
The Fed views the bill as a critical threat to its independence that could let the GAO immediately second guess its monetary policy decisions. Officials fear it and a related effort to force the central bank to identify institutions that access the discount window could panic investors and send fragile markets into a tailspin.
"We think that monetary policy must be done in an independent manner and believe it is most effective without second guessing," Alvarez said. "If the bill were passed today we are concerned that there would be loss of confidence by investors and the public which would hurt our ability to make policy, to ensure price stability and maximize employment."
But Frank drew indications from Alvarez during the hearing that the Fed would be willing to accept a scaled-down version of the Paul bill.
"On the window and open markets, etc. … . I do believe it is important that there be a time lag," Frank said. "We could make the distinction so there is a time period so that we can maintain market integrity."
When Frank asked Alvarez if he could agree to a delayed time frame, the Fed counsel responded, "That is something we are giving serious consideration to and we will be happy to work with you."
The GAO is not the only one likely to look over the Fed's shoulder. In an interview late Thursday, Phil Angelides, the chairman of the Financial Crisis Inquiry, said that it plans to investigate the role monetary policy played in the crisis, and that concerns about the Fed's independence would be secondary to conducting a full inquiry. "My view is given the magnitude of what's happened here, dissemination of information to the American people so they can see what happened is paramount," he said.
Though the potential GAO audit is causing heartburn at the Fed, the inquiry panel could create fewer headaches.
The central bank has released transcripts Federal Open Market Committee meetings through 2004, which could provide investors with important understanding about why the Fed kept interest rates so low during the early part of the decade.
Frank and Rep. Mel Watt, the panel's monetary policy subcommittee chairman, agreed Friday that a limited version of the Paul bill would be attached to regulatory reform.
"The question is not whether there will be some kind of increased audit of the Fed but how that will take place," Watt said.