Janet Yellen's Advice to Rand Paul

Is this not enough?

Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chair Janet Yellen mostly succeeded in her attempt to be vague about Fed policy in her semiannual appearance before Congress on Tuesday. On one issue, however, she was unequivocal -- and correct: A congressional audit of the Fed's interest-rate decisions is a very bad idea

The Fed is already "extensively audited," she said, and Senator Rand Paul's bill to audit it even more "would politicize monetary policy." Were such congressional micromanagement possible in the 1970s, she pointed out, former Fed Chairman Paul Volcker would probably not have been able to defeat inflation by pushing up interest rates to double digits and forcing the economy into a recession. 

Undermining the central bank's political independence would ultimately harm the economy. Studies show that independent central bankers are better stewards of their economies than are politically appointed finance chiefs. The reason is simple: Politicians often favor easy-money policies that promote short-term growth and boost their re-election chances, even if they bring on inflation later. 

There are more useful Fed changes that Paul could pursue instead: more openness in the bank's regulatory deliberations, for example, and a reduction in the power enjoyed by the New York Federal Reserve Bank. Yellen could also institutionalize what she now does voluntarily: brief lawmakers before her semiannual testimony to better prepare them. 

She might start with Paul, who appears to suffer from both misunderstandings (confusing assets for liabilities on the Fed's balance sheet) and misapprehensions (worrying about inflation, which has undershot the Fed's 2 percent target for three years now) about the Fed's role. Sadly, he is not alone: His bill, which will be the subject of a Senate Banking Committee hearing next week, has 30 co-sponsors, and a version of it has already been adopted by the House. 

The bill would subject the Fed's balance sheet and monetary-policy deliberations to congressional audits. Yet the Fed is already audited 10 ways from Sunday. Deloitte & Touche and an inspector general perform an audit of the Fed's financial statements, its $4.5 trillion portfolio of assets and their market value, and the central bank's compliance with laws and regulations. The Government Accountability Office further reviews the Fed's internal controls. 

These reports are available, in all their soporific splendor, to members of Congress. Paul surely knows this. So what is the purpose of his bill? Ask Senator Bob Corker, Republican of Tennessee, who opposes it. The bill is "an attempt to allow Congress to put pressure on the Fed’s members" on monetary policy, he told Yellen. "That would not be a particularly good idea.”

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.