Committee seeks greater scrutiny for Fed

Committee seeks greater scrutiny for Fed actions

By Krishna Guha in Washington

Financial Times, June 4 2009

Government auditors would be allowed to examine the Federal Reserve’s response to the financial crisis – a move many believe would threaten the Fed’s independence – under an amendment adopted by the oversight committee of the US House of Representatives.

The amendment, proposed by congressman Dennis Kucinich, is subject to referral to the House financial services committee as well as approval in the Senate, and may never be law.

But it highlights the growing pressure in Congress for greater scrutiny of giant Fed lending and asset purchase programmes put in place to fight the financial crisis. The possibility of greater scrutiny could deter private sector companies from participating in some Fed programmes, reducing their effectiveness.

The Kucinich amendment goes far beyond legislation recently signed into law by Barack Obama, US president, which gives auditors access to Fed programmes that are blended with government bail-out funds.

It would give the Government Accountability Office authority to audit the Fed’s entire activities, including its commercial paper programme, primary dealer loans, term auction facility, foreign exchange swaps and asset purchases.

The Fed declined to comment on the amendment. But Ben Bernanke, Fed chairman, has told Congress’s joint economic committee he will “resist any attempt to dictate to the Federal Reserve how to make monetary policy”.

Mr Bernanke has said he views the Fed’s loan and asset purchase programmes as an extension of core monetary policy in extreme circumstances – a strategy he calls “credit easing”.

But critics, including within the US central bank, say its operations have crossed the line between fiscal and monetary policy, which is murky when interest rates are close to zero.

Some current and former senior Fed officials fear these actions invited a Congressional backlash against Fed independence, which is now emerging.

At the House budget committee this week, Democratic representative Lloyd Doggett told Mr Bernanke: “the Fed . . . seems to have sprung into action through the back door as a way for some to avoid another request to the Congress for public funds through the front door.”

In addition to pressure for more Fed disclosure, there has been talk of a renewed effort to strip the regional Fed presidents of votes at the federal open market committee.