Issues in Financial Regulation

GAO Audits

 

Federal Reserve Bank of Richmond

The Fed's commitment to being accountable and transparent

The Issue

Before the Dodd-Frank Act, the Government Accountability Office already had authority to review many Federal Reserve System activities and operations. Congress considered several proposals to expand the GAO’s authority to include review of monetary policymaking. The Dodd-Frank Act ended up establishing several reviews of Federal Reserve governance and lending programs but did not allow the GAO to review the Fed's deliberations, decisions and actions on monetary policy.

Richmond Fed's Perspective

The Federal Reserve's ability to act in the long-term best interests of the economy relies on its credibility and independence from short-term political pressure. Congress purposefully chose to exclude monetary policy from GAO review to ensure that the Fed could "independently conduct the nation's monetary policy." Countries where the central bank is protected from short-term political pressure have been shown to have better economic performance, including lower inflation and interest rates.

The Federal Reserve is committed to being accountable and transparent. To that end, the Fed publishes a wealth of information on its operations and is subject to extensive oversight, including external financial audits, GAO reviews and semi-annual reports to Congress. The Fed is the only central bank to publish its balance sheet on a weekly basis. In addition, the Federal Open Market Committee announces at each meeting a summary of its decision and reports the vote of the Committee.

Allowing the GAO to "audit" monetary policy decisions would politicize the process which could lead to worse outcomes, as the Great Inflation experience of the 1970s demonstrated. GAO reviews of monetary policy could hinder free and open discussions and deliberations, the heart of sound decision-making, if policymakers believed that their actions would be subject to political pressures.

Additional Information

Economic Quarterly, Winter 2001
The 50th Anniversary of the Treasury-Federal Reserve Accord, 1951-2001 

Economic Quarterly, Fall 1996
Central Banking in a Democracy

Region Focus, Fall 2009
The Evolution of Fed Independence

Region Focus, Spring 2007
The Evolution of Fed Communications

Region Focus, Fall 2004
The Road to Independence

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Richmond

Jim Strader
(804) 697-8956
(804) 332-0207 (mobile)

Laura Fortunato
(804) 697-8196
(804) 698-0927 (mobile)

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The Richmond Fed is the region's connection to the nation's Central Bank.