Congressional Oversight of the Federal Reserve

Introduction

On February 17th The Economist published an extended essay on the current state of central banking entitled “A More Complicated Game.” The essay described how the West’s financial crisis has shaken public confidence in its leading central banks. Yet the crisis has also led to an expansion of central bank duties and powers. The article described how the Federal Reserve, the Bank of England, and the Eurosystem have expanded their “remits,” either at their own initiative or at governments’ behest, well beyond ordinary monetary policy, and that they are taking on more responsibility for the supervision of banks and the stability of financial systems. The essay pointed out that for better or worse the world is relying more than ever on its central banks, and that the relationship between the central bank and the government is going to become more difficult and more political.

The Economist essay describes well the nature of the predicament that central banks confront today. This essay presents a diagnosis of that predicament and proposes a solution.1 Briefly, the perplexing situation arises because central banks must pursue monetary policy independently, yet their capacity for independent action draws them into expansive credit policy initiatives whose fiscal policy implications threaten their independence. The solution involves setting the priorities for independent monetary policy and clarifying the boundaries for expansive credit policy.

In the United States, the solution requires an overhaul of congressional oversight of the Federal Reserve. The oversight process must (1) enforce a low inflation priority for independent monetary policy, (2) limit independent credit policy, and (3) authorize any expansive Fed credit initiatives. The overhaul is needed to discipline the oversight process to preserve a workable and sustainable division of responsibilities between the Fed and the fiscal authorities, especially with respect to the stabilization of banking and credit markets.

Read the full report here.