It may be a mark of the increasing confidence in the trajectory of the U.S. economy that Federal Reserve Board Chair Janet Yellen, in her quarterly press conference yesterday, faced an unusually large number of questions unrelated to the Federal Open Market Committee’s interest rate deliberations. But it also demonstrated how many other issues Yellen has on her plate.
For instance, Yellen was asked what would happen next year, when Republicans control both houses of Congress, and the element of the Republican Party that wants to rein in the Fed’s independence when it comes to setting monetary policy will have a much louder voice.
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Kentucky Sen. Rand Paul, following his father’s example, has been vocal about pushing legislation to “audit the Fed.” To be clear, the Fed is already subject to extensive financial auditing. What Paul wants is a policy audit, essentially having the Government Accountability Office – the investigative arm of Congress – review the FOMC’s decisions on monetary policy.
WHY THIS MATTERS
Economist Thomas Cooley said it best in Forbes, back in 2009: “An independent central bank can focus on monetary policies for the long term; that is, policies targeting low and stable inflation and a monetary climate that promotes long-term economic growth. Political cycles, alas, are considerably shorter. Without independence from the political cycle the central bank would be subject to political pressures, which in turn would impart an inflationary bias to monetary policy.”
Auditing the Fed is something of a Paul family obsession. Rand Paul’s father Ron Paul, the former Texas Congressman and perennial presidential candidate pushed such proposals for years while he was in Congress. He even provoked a public response from former Fed Chair Ben Bernanke earlier this year.
Yellen began by making the case for the FOMC’s independence.
“The ability of the central bank to make the decisions about monetary policy that it regards as in the best longer run interest of the economy free of a short-run political interference is very important to the effective conduct of monetary policy,” Yellen said. “I think history shows not only in the United States, but around the world that central banks’ independence promotes better economic performance.”
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She even agreed that the Fed needs to disclose information to the public.
“We should be accountable, and we are accountable to Congress in explaining what we do. I believe strongly in transparency, and I believe strongly that we should communicate as clearly what we are doing and the rationale for doing it and am a very open to looking for ways ourselves to improve our communications and transparency and working with Congress to do that.”
However, allowing Congress to regularly second-guess its policy decisions?
“Back in 1978, Congress explicitly passed legislation to ensure that there would be no GAO audits of monetary policy decision-making, namely policy audits. I certainly hope that will continue, and I will try to forcefully make the case for why that's important.”
Translated from Fed-speak: “Over my dead body.”
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Yellen was also asked to address a series of scandals at the Federal Reserve Bank of New York, far and away the most important of the 12 regional Reserve Banks. The New York Fed is run by William Dudley, who spent more than 20 years working for the investment bank Goldman Sachs.
Awkwardly, a number of the scandals that have arisen at the New York Fed of late have involved employees with a conflict of interest related to…Goldman Sachs. Recently, for example, a New York Fed employee was found to be sharing privileged information with a former colleague who had moved to Goldman.
Pedro da Costa of Dow Jones asked pointedly about Yellen’s opinion of the New York Fed and about Dudley’s ability to restore its reputation.
“Do you see the New York Fed as a black mark on the Fed system because of the recurring scandals?” he asked. Then he added, “Do you think a person that spent 21 years of his career at Goldman Sachs is in a position to regain public credibility about conflicts of interest?”
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Yellen spent considerable time in a discursive answer defending the fed’s supervisory system, pointing out that, among other things, it contains safeguards meant to prevent any single individual from overly biasing the supervision of a particular institution.
She failed to mention Dudley at all in her response, leading another reporter to ask her to clarify her opinion of the New York Fed president.
I have great confidence in President Dudley,” she said. After describing him as a “distinguished public servant,” she said, “He has done a fine job of running the New York Fed.”
Yellen was also asked to address the ongoing currency crisis in Russia, and the related volatility in oil prices.
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“Clearly, Russia has been hit very hard by the decline in oil prices, and the ruble has depreciated enormously in value,” she said. “And this is posing a series of very difficult economic conditions in the Russian economy.
However, she noted, Russia’s struggles will have little in the way of direct impact on the U.S. because the two countries have little economic interconnection.
On oil, she said, “The movements in oil prices have been very large, and undoubtedly unexpected.”
She said that she doesn’t expect any immediate damage to the U.S. as a result of plunging oil prices, but indicated that the Fed’s policymakers will be paying very close attention to the oil market’s movements in the near future.
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