Federal Reserve Chairman Ben Bernanke, completing his second day of testimony on Capitol Hill, voiced his opposition Wednesday to a Republican-backed bill that would subject the Fed to outside auditors – and, he said, unhealthy political pressure.
The bill, by Rep. Ron Paul, R-Texas, would allow the Government Accountability Office to audit the Fed’s monetary policy deliberations; right now, such deliberations are exempt from audits, although other financial aspects of Fed operations are subject to audit.
“To eliminate the exemption on monetary policy deliberations would effectively – at least to some extent – create a political influence, or a political dampening effect, on the Federal Reserve’s policy decisions,” Bernanke said in testimony to the House Financial Services Committee.
Bernanke said he agrees with Paul that the Fed needs to be transparent and accountable. He said it has been doing so with statements, testimony, quarterly projections and press conferences.
But Paul’s bill, he said, could factor politics into monetary policy deliberations.
“That (the audit bill) is a great concern, because there’s a lot of evidence that an independent central bank that makes decisions based strictly on economic considerations and not based on political pressure will deliver lower inflation and better economic results in the longer term,” he said.
Michael Dueker, a former economist at the St. Louis Federal Reserve and current chief economist at Russell Investments, said in an interview after the hearing that it is very unlikely the bill will become law. He also said there is enough oversight of the Fed already. The House of Representatives is set to vote on the Paul bill next week.
“The Fed would resist strongly any sort of oversight in terms of second guessing their decision making,” Dueker said. “I don’t think the Paul bill will go anywhere.”
Bernanke also stressed the unsustainable state of current U.S. fiscal policies and the impending “fiscal cliff” that awaits the country if expected tax increases and spending cuts take place on Jan. 1, 2013.
If those increases and cuts take effect, Bernanke said, the Fed predicts a shallow recession would occur early next year and fewer jobs would be created. Public uncertainty about the economy could make the economic situation even worse, he said.
Dueker said the impending spending cuts are a bigger concern than the tax increases, since tax codes can be passed retroactively. But cuts to Defense Department spending are much harder to reverse after the fact, he said.
“The first order of business would be to do something to relieve the full draconian force of defense cuts,” Dueker said. “Time is on the side of tax changes more than it is on the spending cuts.”
Bernanke recommended that Congress address these economic challenges by taking into account long-term sustainability as well as “the fragility of the recovery” in order to boost public confidence in the economy.
“Under current law, taxes will continue to grow, interest will continue to accumulate and ultimately, we will simply not be able to pay our bills,” Bernanke said.
The impact of the tax increases and spending cuts all hitting at the same time “would be very negative for growth,” he said. “It is important to find a more gradual approach.”