Spearheaded by financial reformers such as Rand Paul, the movement to audit the Federal Reserve’s conduct has grown in recent years. One current proposal would subject the Fed’s monetary policy to Government Accountability Office audits. While this is aimed to prevent the creation of asset bubbles that we’ve seen from late-Greenspan, Bernanke, and Yellen, it poses additional problems for the US’s financial system.
Jerome Powell, the only Republican currently serving as a Federal Reserve Board governor, gave a speech on 9 February, expressing worry that an audit would produce “substantial risk of political interference”. Considering the atrocious left-wing, expansionary movement the Fed has made since Greenspan’s exit (QE and ZIRP), further politicization of central bank policy should be avoided at all costs. Powell added that Fed policy is most effective when “rendered independent of influence by elected officials”.
This false panacea does nothing to solve the structural problems that the Fed faces. Dallas Fed Chairman Richard Fisher argued that the Fed was “audited out the Wazoo”. While his statement isn’t entirely accurate as outside institutions have no direct control over the Fed’s open market operations, some truth lies in the claim. The Federal Reserve Reform Act of 1977 forced the central bank to “promote maximum employment, production, and price stability”, establishing direct policy objectives for the first time. Since then, interest rate policy has become unstable in order to achieve these goals, often causing financial crises.
Aside from the poor policy decisions, which can only be repaired through the appointment of rational governors to the FRB, many structural problems exist within the Federal Reserve System. Many market analysts believe that too much power rests with the New York Fed. Assets and transfer volume are fragmented throughout each of the system’s 12 regional banks. Decreasing the number of banks to six (New York, Dallas, San Francisco, Saint Louis, Atlanta, and Chicago) would concentrate these indicators and decrease the relative power of the New York Fed. After the unsightly burden that Dodd-Frank placed on smaller financial institutions, a reduced number of regional banks could redirect their conduct to verifying the transactions of the largest holding companies, which are typically based in the six aforementioned cities.
To further inhibit the political implications placed on the Fed, the Presidents of the six regional banks should be given permanent Federal Open Market Committee voting power. Consolidation of the regional banks and new power in the FOMC will dramatically increase efficiency of the Federal Reserve System’s objectives. The new voting seats also bring a variety of views, notably that of Saint Louis Fed President James Bullard, who warned that failure to increase the federal funds rate would create “some risk” and other options would be “resolved in a violent way”.
Those that advocate abolition of the Federal Reserve fail to realize two key points. When a country has a nationalized currency, like the United States, a central bank is needed to ensure the limited stability of the currency. Combined with a fractional reserve banking system, a central bank provides liquidity to financial institutions. Privatization of the world’s currencies is the best option of reform, however this is politically impossible for at least the next two decades. In the meantime, the Federal Reserve needs to be operating in the most efficient manner in order to ensure proper function of financial markets.