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What Fed Officials Really Don't Want You to Know (Hint: They are Telling You)


This morning I had a query from someone asking me to share my thoughts about the Federal Reserve Transparency Act, better known as the bill to "Audit the Fed." Having given him a brief answer, I thought I might say a little more here.

Although Rand Paul promises that his measure will shed much-needed light on the Fed's undertakings (the Senate version of his measure was even called "The Federal Reserve Sunshine Act"), the truth is that it's unlikely to reveal any new facts of importance beyond what existing Fed audits–including those provided by Title XI of the Dodd-Frank Act (which provides for a GAO audit of the Fed's crisis-related emergency lending)–can themselves reveal.

True, unlike existing measures Paul's bill would also let the GAO "audit" the Fed's conduct of monetary policy, including its open-market operations and financial dealings with other central banks. But if "sunshine" is the first word that pops into your head when contemplating this possibility, you probably have had a little too much of it already. Certainly you have not read many GAO reports.

Don't get me wrong: the GAO does its job's well, and a report by it on the Fed's conduct of monetary policy would probably be a much better read than most academic papers on the same topic. But if you're looking forward to seeing the GAO give the FOMC a good thrashing, or to any other sort of scintillating reading, you're barking up the wrong tree, because what you're likely to be in for instead is a bunch of charts and tables, accompanied by a competent but very measured and detached review of the Fed's activities, of the sort that might prove very handy for assessing the Fed's performance, but that is hardly likely to be the least-bit earth-shattering.

But if some dry-as-dust report is all we're talking about, why are Fed officials so up in arms about the proposal? That's a good question. Fed officials themselves claim that Paul's measure would give Congress the power to "harass" the Fed, thereby allowing it (in Dallas Fed President Richard Fisher's words) "to bend monetary policy to the will of politicians." But as my colleague Mark Calabria explains, the measure wouldn't allow anything of the sort. Evidently these Fed officials were too busy arranging the Fed's wagons in a big circle to take time to actually read the measure they were so anxious to defend their institution against. Had they bothered they might have noticed that the it calls for the GAO, and not "Congress" (or any body of "politicians") to report on the Fed's policies. They might even have taken a moment to recall that the GAO is an independent agency–just like the Fed's own Board of Governors–whose head, the Comptroller General of the U.S., is a non-partisan professional appointed by the President–rather like their own Chairman. Finally, they might have chewed a little on the GAO's own description of its mission, which is "to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people."

In short, what we have here is one independent agency of the U.S. government insisting on its right to be uniquely exempt from review by another independent agency charged with making sure that Congress and its departments and agencies perform their Constitutional duties successfully and efficiently. That's not fighting to preserve independence. It's fighting to avoid accountability.

Come to think of it, perhaps Paul's proposal will reveal some deep, dark Fed secret after all. Perhaps it already has.


  1. Amen and Hallelujah, Brother! You lived in Georgia long enough to know what I mean.–Walker Todd

  2. Their financial operations have been audited for a long time. Their policy decisions, which as you say is what this is all about, are announced immediately, summary minutes one month later and a verbatim transcript of policy meeting (which I think is a bad idea as it taints a free and open discussion amount the FOMC members) are made public with a much longer delay. Thus anyone who thinks they have any expertise to critic monetary policy decisions can and many do. A GAO policy audit would add nothing of value. The FOMC members provide their own critics as well.

    1. I don't disagree, Warren, except to the trivial extent of believing that having one more assessment (the GAOs) can't hurt. But I see this, not so much as reason to find fault with Paul's measure, as reasons for regarding Fed officials' fervent opposition to it as ludicrous.

  3. “Evidently these Fed officials were too busy arranging the Fed's wagons in a big circle to take time to actually read the measure they were so anxious to defend their institution against.”

    Central planners don’t like their “plans” examined. -Or- The central planner failed to plan for their plans to be examined.

  4. George –

    Can you suggest a useful fact that might be uniquely discovered by a GAO audit, but would not likely be used by one political party or the other to embarrass the Fed? Vague claims like "wouldn't hurt" aren't arguments; they are conclusions.

    1. I don't claim that anything can be "uniquely" discovered by the GAO–or by anyone else. But so what? One could say that about any number of GAO reports, or reports more generally, without implying their uselessness. And if we are to condemn any report or inquiry, no matter how independently conducted, on the grounds that a political party might make hay with it, what sort of inquiry would we not have to condemn? And if politicians are especially inclined to make hay with GAO reports, that can only be because such reports are generally regarded as credible–which is an argument in their favor, rather than one against them.

      In any case I don't think the burden of proof should fall on those who say that the GAO should be allowed to inquire into the Fed's (read: Board of Governors) performance just as it inquires into the performance of other government agencies and branches. Let the Fed's champions come up with a convincing argument against such an inquiry. So far, misleading claims about such reporting constituting a breach of the Fed's independence notwithstanding, they haven't.

      Finally, if the Fed doesn't like what the GAO has to say about its conduct, it has ample resources with which to respond, including hundreds of economists on its payroll.

  5. "I don't claim that anything can be "uniquely" discovered by the GAO–or by anyone else. But so what?"

    Why do you believe the GAO and the Fed should divert resources to a study whose value you cannot defend? Even if the only dangers are unknown, you need an upside to justify the action, and you have offered none. NO ONE wants to go to the proctologist, no matter how safe the exam.

    "In any case I don't think the burden of proof should fall on those who say that the GAO should be allowed to inquire into the Fed's (read: Board of Governors) performance just as it inquires into the performance of other government agencies and branches.

    You're just not trying hard enough. Name an agency the GAO audits, and I bet either of us could come up with a useful fact that might be discovered on audit – a fact with managerial but not political implications. Do you really think Rand Paul cares about providing that useful service to the Fed? Do you think he wants to see if they are guarding the paper clips and policing the time cards? He wants ammo for the free banking argument. And so do you.

    1. I have repeatedly insisted that a GAO report could be useful even if it doesn't contain any earth-shattering revelations. There is also plenty of obscure stuff that such a report could inform the public about, including the Fed's expanded reverse-repo operations and experiments, which desperately call for some careful outside scrutiny.

      Concerning my and Rand Paul's motives: the very fact that you have to refer to them suggests the weakness of your own position, for if a GAO report of the sort being contemplated would indeed advance the case for ending the Fed, it could only mean one of two things. First, that the GAO shares my and Paul's supposed bias–a highly doubtful proposition–or, second, that Paul and I are in fact on to something!

      Suppose, on the other hand, and for the sake of argument (for I don't wish to engage in motive-guessing), that you are motivated by a deep admiration for the Fed and that you therefore welcome whatever will enhance its power and prestige. Why should you then not want to have the GAO supply an independent assessment of its performance? Why don't you suppose that such an assessment would further your own cause?

      The bottom line remains the same: the GAO is a public watchdog, assigned to make sure government departments and bureaus do their jobs well and efficiently. What positive argument can you offer for continuing to deny it the opportunity to assess the Fed's conduct of monetary policy, and thus provide the public with one additional resource–and one from a source that that is, unlike most others (and unlike the Fed's own truckloads of often self-serving publications) reputedly independent and unbiased, with no particular axe to grind–by which to inform its own opinions?

  6. "… a GAO report could be useful even if it doesn't contain any earth-shattering revelations."

    An audit that finds nothing would be useful, if anyone who didn't have an anti-Fed agenda had any doubts about matters that an audit would reveal. But we don't. Only the anti-Fed folks want to go fishing to see if they can find something to distort. Whatever the legislation says, its supporters want it because they want to distort what comes out of it, and they cannot distort what does not exist.

    The Fed keeps some of its thinking secret to prevent people from over-reacting. You do believe that there is such a thing as public over-reaction, right? My political assessment is that RP is counting on it.

    "What positive argument can you offer for continuing to deny it the opportunity to assess the Fed's conduct of monetary policy,"

    I don't need to. I don't buy your claim that the burden of proof is on the Fed or its supporters to explain why, after 100 years, the Republic is at risk because the Fed is hiding something we all need to know. RP is clearly out to make trouble, and this bill is his way of getting the camel's nose under the tent. I think he has to make the case more powerfully than it has been made to date.

    1. Let's see: you first misrepresent (for the second time) my claim that a GAO report might not contain anything "earth shattering" as an admission that it would contain "nothing." You then go on, quite inconsistently, to argue against such a report on the ground that it might reveal some Fed "secrets" to which people might "over-react." I think you need to make up your mind: either argue against the report because it won't reveal anything, or argue against it because it will reveal things to which persons will overreact.

      As for the risk faced by the Republic, as you put it, it doesn't consist of any secret Fed plan. The risk is that of maintaining monetary arrangements that have been defective all along, for want of adequate critical scrutiny of those arrangements. That you and the Fed's other champions happen to entertain a complacent view of these arrangements is no reason to deny others the opportunity to seek the opinion of experts at a reputedly independent and unbiased watchdog agency established expressly for the purpose of providing such input.

  7. George –

    I think you are the one misrepresenting. I asked if you could name something "uniquely useful" that would emerge from a GAO report, and you replied that the report need not contain anything uniquely useful because a useful report need not contain something uniquely useful. (That there may exist a useful report with no uniquely useful information hardly makes EVERY such report worth creating.) You then claim to have said "repeatedly" that the GAO report need not find something "earth-shattering." On this planet, "earth-shattering" does not mean "uniquely useful." So where is the repetition? The obscure stuff that you hypothesize might be useful would probably be unique to a GAO report, satisfying my demand, but you cannot even guess at an example. That is how fishing expeditions work.

    As for having it both ways, a GAO report that causes an over-reaction does not on that account contain something "uniquely useful" (including among the uniquely useful an "all-clear" from someone whose opinion on that score is useful to the public). Information that causes an over-reaction is uniquely destructive, not uniquely useful. There is no inconsistency in saying that a GAO report (i) won't reveal anything uniquely useful, and (ii) may reveal something that should not be known publicly. And, as your link makes clear, the information is already out there to be misinterpreted by anyone who cares to misinterpret it.

    You are missing a chance to change your mind. But maybe that would be too Keynesian a response to discovery.

    1. 1) A report can usefully compile and discuss information that is also available elsewhere. The GAO reports often fit this description.

      2) I cannot imagine what secrets the Fed might need to maintain for the sake of being able to do its job regarding open-market operations and transactions with other central banks. There is nothing analogous to, say, having to divulge the names of private recipients of emergency loans (a matter dealt with in the Dodd-Frank audit).

      3) As you keep insisting on examples of the sort of stuff a GAO report might reveal, consider the unnecessary (but very profitable) "churning" revealed by Friedman in the early 80s, and still going on a decade later. Systematic scrutiny by a formal watchdog would uncover such special-interest-motivated waste more quickly, while the anticipation of it alone could promote more efficient and responsible conduct.

      4) I haven't heard from you any reason for changing my mind about an audit. That some might overreact to it is of course true. But it is no less true that some might under-react, and that others (most, presumably) won't react at all. These mundane truths apply to any new or newly-presented information, but are generally not considered an argument for suppressing such.

      In fact, I wasn't very keen on Paul's proposal at first (nor, for what it's worth, are my politics such as would make me likely to vote for him in a presidential race, were it to come to that). Like many I assumed that there must be something to the claims I was hearing about such an "audit" (a misleading term in any case) posing a threat to the Fed's independence, especially by giving Congress some means for directly influencing the Fed's discretionary monetary policy operations–something I by no means wish to see. But when I looked into the matter, I saw no grounds for those claims. Having thus seen the facts change, I in turn, in good Keynesian fashion, changed my mind.

      You need not credit it, but it is in fact so.

      1. 1. So in our cost/benefit analysis, we can include as a benefit "may usefully compile and discuss information that is also available elsewhere." On that rock you will build your church? OK, then.

        2. I can't either, although I don't know why the choice of emergency loan recipients would be outside the purview of the GAO report. But if there are no secrets to keep, there is still nothing new to reveal.

        3. How do you know that the "churning" is still going on, if the GAO report would "reveal" it?

        4. I am not questioning your good faith. I'm just saying that you have not made the case for the "audit," and that shifting the burden of persuasion is not your prerogative. If our disagreement comes down to who needs to make the case, then we will disagree on that, and life will go on.

        See you next time.

        1. To be frank, I'm not entirely sure why, "It wouldn't hurt to have another, independent set of eyes on a very powerful institution", isn't a good enough argument in itself. You have failed to highlight any massive damage this audit capacity might cause and a little precautionary attentiveness is a good in itself when the cost isn't that high (which, in the grand scheme of the Federal budget, it almost certainly would not be…unless you can tell us why an annual GAO audit of the Fed would be a multi-billion dollar line-item).

          This really is a case where the proper answer to, "Why", is, "Why not?"

          1. "I'm not entirely sure why, 'It wouldn't hurt to have another, independent set of eyes on a very powerful institution', isn't a good enough argument in itself."

            I'm not entirely sure either. But I'm pretty sure, and that works for me. People – mostly lawyers – say "I'm not entirely sure" to imply that the other guy is obliged to care whether the speaker is "entirely sure." But I don't care whether you are entirely sure: I don't have to make an affirmative case at all, much less one that renders you "entirely sure" that I am right. You are offering as your answer an answer that would continue to be as valid after a GAO audit as before, as the argument that there MAY be one more tidbit to find by yet another audit never goes away. At some point, the agency under attack gets to say "Enough, already." I believe the Fed is there now. You don't. And there we stand.

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