Congress Warned: Stop Meddling in Fed’s Affairs

The Federal Reserve defended its independence against efforts in putting its monetary policy under political sway, saying that meddling by Congress would hurt the economy.  

The vice chairman of Federal Reserve, Donald Kohn, said that opening some of the fiscal decisions of the Fed to political intervention could hurt the credit rating of the United States as long term interest rates would go up.  

Congressional Hearings

The statement of Kohn came during a congressional hearing for the proposed bill seeking to open the Fed’s policy decision making to an audit by federal oversight.  The proposed bill is gaining momentum in the U.S. House of Representatives as more than half of its members co-sponsored the measure.  

Kohn added that significant political intervention in the affairs of the Federal Reserve could undermine its monetary independence which may result to the erosion of investor confidence.  Kohn said that such measure could also lead to higher long term interest rates.  

Financial System Reform

The testimony of the Kohn comes as Congress began to debate the merits of the plan of the Obama administration to reform and regulate the financial system.  The plan seeks to expand the role of the Federal Reserve in monitoring risks across the entire financial system.  

The administration’s plan precipitated a call for greater accountability at the Fed which is facing close scrutiny over its decision to bailout Wall Street.  

Kohn contended that the plan of the Obama administration for reform will not give undue powers to the Fed.  He also said that the central bank will work “hand-in-glove” with monetary policy.  

The aggressive approach of the Federal Reserve to restore financial calm resulted to rigorous hearings and investigations from Congress.  The Fed’s email communications have been subpoenaed as Congress seeks to recall episodes when the central bank came under attack and yielded to political pressures.  

Stiff Opposition from the GOP

The bill was sponsored by Representative Ron Paul, a Texas Republican and a known enemy of the Federal Reserve.  Paul’s bill seeks to expose the monetary policy of the Fed to audit by the Government Accountability Office.  

The GAO currently does not have audit powers over the Fed.  According to Kohn, removing the exclusion would unduly worry investors and could lead to the perception that the decisions of the Fed will be based on political expediency rather than economics.  

Kohn emphasized that the Federal Reserve strongly believes that subjecting the institution to GAO audit will undermine its independence and will be contrary to public interest.