3 (4) discussions and communications among Governors, officers and employees of the System concerning any of the three topics listed above. In light of these prohibitions, the GAO cannot conduct a full "financial audit" of Federal Reserve Banks, that is, a complete examination of the Banks' financial accounts and statements. Its authority to perform "financial" audits is limited to accounts or transactions not covered by these exceptions, including its traditional authority to audit the functions Federal Reserve Banks perform as fiscal agents for the Treasury. In the aftermath of the 1978 Act, the GAO examined the auditing procedures used by the Federal Reserve in conducting its internal audits. While making some recommendations for improving these procedures, it concluded that they were generally satisfactory, that "The General Auditors...are all organizationally independent, aligned to report to the highest practicable level, and staffed with professionally qualified auditors. In addition, the General Auditors...have established a System-wide set of auditing standards which are generally consistent with professional internal auditing standards." (p.iii, GAO Report #GGD-80-59, 8/8/80). V. AUDITING AND OVERSEEING MONETARY POLICY As noted above, the GAO is explicitly prohibited from auditing "deliberations, decisions, or actions on monetary policy matters...." This does not mean that the GAO cannot issue reports on monetary policy. Indeed, it has issued such a report, entitled "An Analysis of Fiscal and Monetary Policies" (#PAD-82-45, dated 8/31/82). It does mean that GAO cannot have access to internal documents, deliberations, communications, projections, or accounts of the Federal Open Market Committee or the System Open Market Account in preparing such reports. For preparing such reports it must rely on the same data and information available to the public. This prohibition on GAO "audits" of monetary policy is justified on the following grounds: Monetary policy is not the proper subject of a "audit" in the normal sense of a "financial audit." The Federal Open Market Committee is not an entity with a "financial condition", financial statements or financial transactions. It is a body that deliberates, reaches decisions and issues directives for the conduct of monetary policy. In the normal sense of a "financial audit," there is simply nothing to audit in the Federal Open Market Committee. Therefore, "auditing" the Federal Open Market Committee -- that is, auditing monetary policy - could only mean an examination of the conduct of monetary policy as such. That would entail an examination of such questions as: - What are, and what should be, the goals and objectives of monetary policy? Controlling inflation? Stimulating economic growth? Stabilizing the foreign exchange value of the dollar? Stabilizing nominal GNP? - What are, and what should be, the operational targets of policy? Interest rates? Monetary aggregates? Exchange rates? Commodity prices? Some other indicator? - What are the links between the operational targets and the ultimate objectives? What lags are involved? What trade-offs are required or should be made between multiple objectives? Where should priorities be placed among trade-offs? These are not questions about financial statements, or about the efficient administration or management of government programs. They are not questions that the GAO has any inherent expertise or comparative advantage in addressing. A vast theoretical, institutional and practical literature exists on these questions. There is no chance whatsoever that an official "audit" of monetary policy by the GAO could make any important contribution to what is already known, widely published and widely discussed about these questions. Are there other questions about monetary policy a GAO "audit" might usefully address? What facts could such an "audit" bring to light that would prove useful to the Congress, or the public, in assessing monetary policy? The information needed for an assessment of the impact of monetary policy on the economy, over any reasonable period of time, is already fully available to the Congress and the public. The Federal Reserve, and other government agencies, publish, on a very timely basis, financial and economic data as complete and extensive as one could wish, given the effort the government devotes to the collection and dissemination of such data. The Federal Open Market Committee already publishes its policy directives, delayed by only a few weeks. Since monetary policy is known to affect the economy with considerable lags -- from several months up to two years -- it is unclear whether much could be gained from quicker publication of the FOMC policy directive. Quicker release of the policy directive is, however, an issue in its own right that has nothing to do with a GAO audit. Given the schedules on which the GAO operates, an "audit" of monetary policy would not be available until long after the policy directives for the period being "audited" had already been published, along with the financial and economic data necessary for any outside analyst to assess the conduct and impact of policy over reasonable periods of time. The only information concealed to outside view a GAO "audit" of monetary policy might uncover would relate to the internal policy-making process of the FOMC, and the specifics of the day-to-day or hour-to-hour implementation of monetary policy. As for the later, it is hard to imagine how such details might be useful to the Congress, or the public. A GAO "audit" could reveal them only many months after the fact. And they would be irrelevant for assessing the overall impact of monetary policy --its impact on inflation, growth, unemployment, etc. - since that impact operates over time, with considerable lags, and can already be evaluated by competent analysts through the wide array of publicly available financial and economic data. Analysts interested in additional details of policy implementation that go beyond the FOMC policy directives can turn to the reports regularly published by the Managers for Domestic and for Foreign Operations of the System Open Market Account. (See, e.g., "Monetary Policy and Open Market Operations during 1988" and "Treasury and Federal Reserve Foreign Exchange Operations" in the Quarterly Review of the Federal Reserve Bank of New York, WinterSpring 1989.) Those who think a GAO policy "audit" would be warranted should accept the burden of proof of demonstrating just what data or information critical to the evaluation of monetary policy are missing from the wide array of data and reports already publicly available. Though it is doubtful that a GAO "audit" of monetary policy would uncover valuable and timely information, or yield an analysis of policy more discerning than those already undertaken by outside economists and "Fed-watchers", it would certainly pose a serious threat to the making of monetary policy. Policy-making in the FOMC involves discussion of staff estimates and forecasts, of various alternatives and contingencies, of the Members' own economic assessments and priorities. The value of unfettered internal discussion and debate on such issues should be widely appreciated. If Members and staff of the FOMC knew that every comment, analysis, and forecast made in the course of debating policy would be subject to outside scrutiny and political attack, the free flow of discussion, the unconstrained atmosphere in which difficult policy options can be fully aired, would be stifled. The real decision-making process would either be driven underground, rendering the FOMC little more than the formalizing, rubber-stamping body for decisions reached elsewhere, and/or it would be overtly politicized, with Members tending to support only the less controversial, politically more acceptable assessments, forecasts and policy priorities. The "politically more acceptable" would be defined in terms of what the Congress and/or the Administration would applaud. That would signal the collapse of Fed independence, virtually guaranteeing a monetary policy prone to inflation. Though monetary policy, and the policy-making process, should not be "audited" by the GAO, no public policy should be immune to scrutiny and criticism, by the Congress and by the general public. The Congress has legislated that the Federal Reserve present official semiannual reports on its conduct of monetary policy, and appear before the Banking Committees of the two Houses to testify on those reports. The Fed reports and hearings offer Members the opportunity to query the Chairman of the Board of Governors on any aspect of policy, and to criticize policy however they wish. The Subcommittee on Domestic Monetary Policy conducts additional hearings on monetary policy at various times throughout the year, whenever desired, taking additional testimony from the Fed on various aspects of its policies, as well as testimony from a wide array of private witnesses and experts. The Chairman of the Subcommittee on Domestic Monetary Policy regularly issues reports assessing the Fed's conduct of monetary policy, drawing on the Fed's official reports, the testimony of a broad selection of outside expert witnesses, published analyses of monetary policy by economists and "Fedwatchers", and the work of the Subcommittee staff. In addition to its hearings and reports on monetary policy, the Subcommittee regularly conducts oversight hearings on the budget of the Federal Reserve System. The Fed budget is published annually, and it is open to scrutiny by the public and Members of Congress. A000016109971 5 VI. SUMMARY In summary, there is no lack of relevant information about monetary policy, or of wellinformed analysis of such policy by outside experts. A GAO "audit" of monetary policy, while adding nothing useful, could seriously undermine the independence of the Federal Reserve. That is the issue at stake in proposals (e.g., H.R. 844, H.R. 2795 & H.R. 3512) for GAO authority to "audit" the FOMC and monetary policy decisions. It was settled when the Congress enshrined Federal Reserve independence in the Federal Reserve Act, and it is hard to see a good reason to re-open it now. Compromising Fed independence through the backdoor of a GAO "audit" of monetary policy would tend to expose the Fed to political pressures strongly biased toward inflation. That would be a calamity for the American economy. |