In-Depth: The Chairwoman of the Federal Reserve — Janet Yellen — has fought attempts to audit and externally review how the Fed makes its decisions, for fear that it would “politicize monetary policy.” She has gone on record saying “I want to be completely clear, I strongly oppose Audit the Fed.”
Sponsoring Sen. Rand Paul (R-KY) disagrees, saying:
“A complete and thorough audit of the Fed will finally allow the
American people to know exactly how their money is being spent by
Washington. The Fed currently operates under a cloak of secrecy and it
has gone on for too long. The American people have a right to know what
the Federal Reserve is doing with our nation’s money supply.”
The Federal Reserve Board, the 12 Federal Reserve banks, and the Federal Reserve system as a whole are all subject to audits
by the Government Accountability Office (GAO). The financial statements of the banks and the system in its entirety are audited by the Office of the Inspector General, which also investigates the Federal Reserve's operations. But current oversight has been deemed insufficient by some who want broader insight
into the Federal Reserve's activities, despite fierce resistance
Of Note: Since 1977 the Federal Reserve has operated under what is known as the 'dual mandate' which sets its goal as maximizing employment, while supporting stable prices (avoiding inflation), and maintaining moderate long-term interest rates.
In order to accomplish these goals, the Federal Reserve has three tools at its disposal:
- Open Market Operations, which directly affect the money supply, include the buying and selling of U.S. Treasury bonds to influence the interest rate up or down — whichever is more desirable given economic conditions. When the Federal Reserve buys bonds, the money supply grows and interest decreases. Conversely, when it sells bonds, the money supply shrinks and interest rates rise.
- Changes in the discount rate, i.e. the interest rate that Federal Reserve Banks charge depository institutions for short-term loans.
- Modifying the reserve requirements for depository institutions — which is the ratio of reserves to deposits those institutions are required to maintain in their vaults or on deposit at a Federal Reserve Bank.
In general, if the economy is growing rapidly and there are concerns about inflation rising to a level that erodes consumers purchasing power, the Federal Reserve might raise interest rates and shrink the money supply. It can also attempt to rein in the availability of credit through reserve requirements and the discount rate.
On the flip side, if the economy is in recession or sluggish, the Federal Reserve will attempt to broaden the money supply and lower interest rates to encourage economic growth. Meanwhile it can make credit more available to businesses and consumers by easing reserve requirements.
There are several areas where Federal Reserve critics express their concerns. Free-market activists disagree with Federal Reserve's role in managing the economy. They argue that its manipulations distort interest rates from the market's true equilibrium — leading to 'bubbles' and over-investment. They point to examples like the dot-com bubble or the subprime mortgage bubble.
Other critics point to policies that they say help fuel economic inequality — where the wealthy see their assets grow at a faster rate, while the average person's income remains stagnant. Former Federal Reserve Chairman, Ben Bernanke, isn't persuaded by those claims though — he believes that remedying inequality isn't an attainable goal of monetary policy (other than through job creation). He also foists the blame onto other long-term structural causes of economic inequality like globalization, demographics, and technological progress.
Summary by Eric Revell
(Photo Credit: Flickr user Boston Public Library)