Congress's deepening scrutiny of the Fed might just be getting started

I've said it before, but I find the Federal Reserve as an institution deeply fascinating. It is clearly a governmental institution, operating under the executive branch and subject to congressional oversight. But it operates independently of the executive branch, particularly on monetary policy issues; the Fed is subject to congressional oversight but funds itself through its balance sheet, bypassing congressional appropriations; it is headquartered in Washington, but its monetary policy decisions run through a committee that includes regional Fed bank presidents around the country who are neither nominated by the president nor confirmed by Congress. 

That makes the Fed something of an evolutionary curiosity — the duck-billed platypus of government agencies. But those unique characteristics that make the Fed different have notable implications for the agency, the role it plays in the regulatory ecosystem and the way it conducts its business. The Fed's independence — and independent resources — make it a haven for economists and other academic types, which in turn gives it an air of professionalism and expertise. They're the good guys, Marty.

And because the Fed has a reputation as being the good guys, when Congress was deciding how to put the financial regulatory apparatus back together again after 2008, the Fed ended up with a lot more power than it had before. Besides presiding over a much larger balance sheet than it had before the financial crisis, the Fed also gained new freedoms in extending emergency lending to nonbanks (though that authority was technically bestowed in 1991) and became the regulator for systemically risky nonbanks — if there were any.

Kevin Dietsch/Bloomberg

There have long been voices in Congress that are wary of the Fed and its power and independence. The Audit the Fed movement of yesteryear had adherents on the left and the right, but ultimately that effort came to nothing, as did related efforts to have monetary policy decisions run through an algorithm similar to the Taylor rule. Part of the problem with limiting the Fed's power, at least in those ways, is that while Congress may want the Fed to know who's boss, it also doesn't want to kill the golden goose on the one hand or take powers away from the Fed that it would need in an emergency on the other hand. 

That's why a recent proposal by Sens. Elizabeth Warren, D-Mass., and Pat Toomey, R-Pa., strikes me as so interesting — and potentially consequential for the future of Congress's relationship with the central bank. The bill, introduced last week in the waning days of the 118th Congress, would subject regional Fed banks to Freedom of Information Act requests, whereas the regional Fed banks instead adhere to what they call "the spirit of FOIA."

The first interesting thing about it is who's behind it — you would be hard-pressed to find two more different ideological bedfellows than Warren and Toomey, but without a doubt both are exceedingly serious about banking policy. And rather than a broad swipe at the Fed's power structure like the Audit the Fed crowd, the Warren-Toomey move is decidedly small-ball. So why bother introducing a bill like that? I'll let them speak for themselves:

Toomey-Warren bill would require more Fed accountability

"The Fed and regional Fed banks, despite being creatures of Congress, obstruct congressional oversight inquiries all too often," Toomey said in his statement. "In light of this persistent refusal to comply with reasonable requests for information from both Republicans and Democrats, I'm glad to join with Senator Warren in pursuing reforms that will compel these public institutions to be more transparent and accountable to the American people."

"During the largest ethics scandal in the history of the Federal Reserve system, Fed officials have stonewalled the American people and slow-walked their representatives in Congress," Warren said in her statement. "This bipartisan bill is a necessary response to ensure that no financial regulators can ignore congressional oversight into ethics failures, and finally deliver more transparency and accountability for any wrongdoing."

In other words, Toomey and Warren are both interested in pursuing their own agendas regarding the Fed's direction. Toomey wants more accountability from the Fed on its master account application procedures and is annoyed by regional banks' forays into climate change and economic inequality. Warren, by contrast, seems bent on getting to the bottom of the stock trade scandals that erupted last year when two regional bank presidents were found to have made undisclosed trades and later resigned. Do either of those scandals have legs? I don't know, and neither do Toomey or Warren. But unlike me, they have the power to introduce a bill in Congress that might help them find out. 

Toomey in particular is determined to get more transparency out of the Fed before he retires from the Senate next month. In a rider attached to the defense authorization bill, he included language that would require the regional banks to disclose a list of master account holders and applicants — a move the Fed itself is moving toward with a proposal of its own. And on the insider trading front, the Fed has similarly updated its ethics code to prevent future trading scandals — moves that uncovered undisclosed trades by Atlanta Fed President Raphael Bostic in October.

What makes this iteration of congressional Fed scrutiny different is that it's narrower in scope and aimed at advancing transparency — that makes its bipartisan sheen more durable. The Fed so far seems to agree, though perhaps it would prefer to make those changes on its own terms. But whether Congress puts the screws to the Fed any further largely depends on whether closer oversight from the Fed brings new controversies to light.