LegiStorm

Summary:

Critics of the Federal Reserve (Fed) have long argued for more oversight, transparency, and disclosure. Criticism intensified following the extensive assistance the Fed provided to financial firms during the financial crisis. Some critics downplay the degree of Fed oversight and disclosure that already takes place. For oversight, the Fed is required to provide a written report to and testify before the committees of jurisdiction semi-annually. In addition, these committees periodically hold more focused hearings on Fed topics. Critics have sought a Government Accountability Office (GAO) audit of the Fed. The Fed's financial statements are annually audited by private-sector auditors. Contrary to popular belief, GAO has periodically conducted Fed audits since 1978, subject to statutory restrictions, and a GAO audit would not, under current law, release any confidential information identifying institutions that have borrowed from the Fed or the details of other transactions. The Dodd-Frank Act (P.L. 111-203) resulted in an audit of the Fed's emergency activities during the financial crisis and an audit of Fed governance. GAO can currently audit Fed activities for waste, fraud, and abuse. Effectively, the remaining statutory restrictions prevent GAO from evaluating the economic merits of Fed policy decisions. H.R. 3189, passed by the House, would require annual GAO audits that would not be subject to statutory restrictions. H.R. 24, S. 264, and S. 2232 would also require a GAO audit that would not be subject to statutory restrictions. On January 12, 2016, the Senate voted not to invoke cloture on S. 2232. For disclosure, the Fed has publicly released extensive information on its operations, mostly on a voluntary basis. It is statutorily required to release an annual report and a weekly summary of its balance sheet. In December 2010, the Dodd-Frank Act required the Fed to release individual lending records for emergency facilities created during the financial crisis, revealing borrowers' identities and loans' terms. Going forward, individual records for discount window and open market operation transactions have been released with a two-year lag. More recently, congressional attention has shifted to disclosure related to Fed regulation. H.R. 3189 would require the Fed to conduct quantitative cost-benefit analysis on its rulemaking and disclose more information related to regulation (including international agreements), and salary and financial information about Fed officials and employees. H.R. 3189 and S. 1484/S. 1910 would require the Fed to compare its monetary policy to a rule and release transcripts of its policy deliberations. Although oversight and disclosure are often lumped together, they are separate issues. Oversight entails independent evaluation of the Fed; disclosure is an issue of what internal information the Fed releases to the public. A potential consequence of greater oversight is that it could undermine the Fed's political independence. Most economists contend that the Fed's political independence leads to better policy outcomes and makes policy more effective by enhancing the Fed's credibility in the eyes of market participants. Chair Yellen believes that the GAO audit provision in H.R. 3189 "would politicize monetary policy and bring short-term political pressures into the deliberations of the FOMC by putting into place real-time second guessing of policy decisions." Disclosure helps Congress and the public better understand the Fed's actions. Up to a point, this makes monetary and regulatory policy more effective, but too much disclosure could make both less effective because they rely on confidential information. The challenge for Congress is to strike the right balance between a desire for the Fed to be responsive to Congress and for the Fed's decisions to be immune from short-term political calculations. A potential drawback to greater disclosure is that publicizing the names of borrowers could potentially stigmatize them in a way that causes runs on those borrowers or causes them to shun access to needed liquidity. Either outcome could result in a less stable financial system. A potential benefit of publicizing borrowers is to safeguard against favoritism or other conflicts of interest.