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Eight Ways to Improve the Fed's Accountability

Donald Kohn, former vice chair of the Federal Reserve Board, is Robert S. Kerr Senior Fellow in Economic Studies at the Brookings Institution.
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This week, Congress will exercise one of its most important responsibilities: Holding the Federal Reserve accountable for its management of the economy by questioning Fed Chair Janet Yellen. It’s a process that could be a lot more useful, both for the central bank and for the public.

The U.S. benefits enormously by having a central bank that can conduct its monetary policy in the best interests of the economy, insulated from short-term political pressures. In a democracy, though, the people’s elected representatives have a responsibility to assess how well the central bank is meeting its goals of controlling inflation and supporting full employment. The central bank, in turn, has a responsibility to work with Congress to make that process as effective as possible -- hence the Fed chair’s twice-a-year hearings in the House and Senate.

All too often, those hearings fall short of delivering the information and explanations Congress needs to understand the Fed’s actions and to hold it accountable. Legislators drift off into other topics, or use their time to grandstand for the cameras. Useful lines of questioning are constrained by a five-minute time limit. Apparently dissatisfied with the process, many in Congress are advocating for changes that they claim will help them evaluate the Fed’s policy choices. Their proposals include opening monetary policy decisions to Government Accountability Office evaluation (the “Audit the Fed” bill), and requiring the Fed to publish a simple rule for setting interest rates and justify deviations from it.

We see serious downsides to these proposals. Giving the GAO the authority to second-guess Fed policy decisions and access to confidential information, for example, could subject the central bank to greater short-term political pressures and hinder its already difficult and sensitive deliberations. Elevating the prominence of a simple rule could limit the central bank’s ability to respond to complex economic developments, and would be far more misleading than helpful.

That said, we believe the Fed and the Congress can and should do more to promote understanding and transparency. And we think this could be accomplished without changing the law. In particular:

  1. The Fed should volunteer -- and Congress should agree -- to have monetary policy hearings quarterly, rather than twice a year. If the Fed believes that the economy evolves quickly enough to warrant issuing new projections and taking questions from the media every quarter, then the same reasoning should apply to informing the people’s representatives.
  2. In connection with the hearings, the now semi-annual Monetary Policy Report -- or a streamlined version of it -- should become quarterly. Among other things, the Fed should share the monetary policy rules that it already consults in its deliberations.
  3. The Fed should publicly release the Monetary Policy Report three days before the relevant hearing, so members of Congress and staff have adequate time to digest it.
  4. The Monetary Policy Report should continue to include the Fed’s assessment of financial stability risks. The intersection of these risks and monetary policy should be one focus of the quarterly hearings.
  5. Fed staff should continue to brief and field questions from the congressional staff who prepare members for the hearings. The chair should meet with the leaders of the relevant committees in the week before the hearing.
  6. Congress should establish a process for obtaining and publishing the views of outside experts about key policy issues before each set of hearings.
  7. To make them more informative and allow for more give-and-take, each quarterly hearing in the House should allow only half the committee members to question the chair, and each member should be allotted 10 minutes (instead of the current five).
  8. The Fed should hire outside experts to periodically evaluate the procedures used to generate the economic projections that the Federal Open Market Committee receives from its staff and how the committee presents its own projections to the public. These projections -- both the staff inputs and the committee outputs -- play a critical role in policy making and should be as sound and well-understood as possible. Other central banks have successfully employed such external peer review, which would help Congress and the public better evaluate the quality of monetary policy. 

None of these suggestions would reduce the Fed’s independence. Rather, they would improve Congress’s oversight and the Fed’s accountability, at a time when our economic discourse would greatly benefit from better public understanding and increased confidence in the efficacy and appropriateness of the central bank’s actions.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the authors of this story:
Donald L Kohn at dkohn@brookings.edu
David Wessel at dwessel@brookings.edu

To contact the editor responsible for this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net