A House Subcommittee convened Tuesday to discuss the accountability and the transparency of the Federal Reserve Board, as well as the Fed's expanded powers under the Dodd-Frank Act which was passed into law five years ago this month.
The Financial Services Oversight and Investigations Subcommittee examined the central bank at the hearing, titled "Fed Oversight: Lack of Transparency and Accountability" Tuesday morning. One of the focal points of the hearing was the perceived expansion of the Fed's power under Dodd-Frank beyond its originally intended mandate, which was to promote the goals of maximum employment, stable prices, and moderate long-term interest rates. One of the key takeaways from the hearing, according to the Subcommittee, is that the Fed's newly granted powers under Dodd-Frank call into question whether or not the central bank's accountability to Congress, the Judicial System, and the American people.
"While the Fed’s purview and power continues to grow, opacity reigns supreme within its walls. It is a veritable fraternity where silence is golden, and no one, not even Congress, is allowed to ask questions," Subcommittee Chairman Sean Duffy (R-Wisconsin) said. "This is true not only of how it conducts monetary policy, but also of its internal processes. The Fed’s clamor for ‘independence’ is the underpinning of its argument for circumventing any Congressional accountability. Markets are left in the dark almost as much as Congress."
Fed Chair Janet Yellen responded to allegations of a lack of transparency of the part of the Fed in her testimony before the Senate Banking Committee on February 24 by saying, "The Federal Reserve is the most transparent central bank, to my knowledge, in the world. We have made clear how we interpret our mandate and our objectives, and provide extensive commentary and guidance on how we go about making monetary policy decisions."
The Subcommittee cited as an example of the Fed's lack of accountability the bank's refusal to comply with a subpoena issued by House Financial Services Committee Chairman Jeb Hensarling (R-Texas) in May. Hensarling was seeking documents related to an investigation the Fed performed with relation to a 2012 report by a policy information service that allegedly leaked information on internal Fed discussions before that information as made public. The Fed's investigation found no breaches. The Committee issued a statement saying the Fed had no legal basis for refusing to comply with the subpoena.
"The Fed is the most opaque of the ‘independent’ Federal financial regulatory agencies," said Dr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute, a witness at the hearing. "It sets its own accounting standards that are inconsistent with generally accepted accounting practices for financial institutions and it routinely acts as if its independence on monetary policy matters shields it from disclosing information on its operations including staff salaries, benefits, hiring practices and Congressional inquiries regarding internal investigations. Congress must mandate greater transparency."
At Tuesday's hearing, the Subcommittee suggested that the Fed could greatly improve transparency and accountability if it adopted a rules-based approach to monetary policy. This approach, the Subcommittee said, would be more transparent, more predictable, and easier for the Fed to communicate and for market participants to understand.
In her testimony before the Senate Banking Committee in February, Yellen said that a rules-based approach "would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule. No central bank does that. And I believe that although under the legislation we could depart from that rule, the level of short-term scrutiny that would be brought on the Fed in real-time reviews of our policy decisions would essentially undermine central bank independence in the conduct of monetary policy."
Yellen is scheduled to testify before the House Financial Services Committee on Wednesday, July 15, and before the Senate Banking Committee on Thursday, July 16.
"The Federal Reserve played a starring role in both creating the financial crisis and in its response," said Dr. Mark Calabria, Director of Financial Regulation Studies, Cato Institute, a witness at the hearing. "Despite that role and the Fed’s numerous failings, Dodd-Frank largely expanded its responsibilities. Along with our flawed mortgage finance system, our monetary regime remains one of the unaddressed structural flaws behind the crisis. Without reform, including greater accountability and transparency, the Federal Reserve is almost certain to continue its pattern of inflating asset bubbles, in the false hope such will create wealth and jobs. Given the current stance of monetary policy, the need for reform is particularly urgent, if not perhaps a little too late."