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Fed's Powell slams 'misguided' proposals for deeper Fed oversight

The Federal Reserve could be hamstrung in its response to any future crisis if Congress approves legislation deepening its oversight of the central bank, Fed governor Jerome Powell said on Monday.

In a strong defense of the central bank's continued independence, Powell told a Catholic University law school audience that various proposals being debated in Congress carried more risk for the economy than proponents realize.

Calling the ideas ``misguided'' and ``troubling,'' Powell said they would ``subject monetary policy to undue political pressure and place new limits on the Fed's ability to respond to future crises.''

Jerome Powell
Andrew Harrer | Bloomberg | Getty Images
Jerome Powell

Involvement of the Government Accountability Office in particular ``would likely inhibit the debate and flow of information...which would lead to poorer decisions,'' and make it difficult for markets to interpret or anticipate Fed actions, he said.

The central bank's ability to act forcefully helped the country bounce back from the worst economic crisis in a century, Powell said, while some of the issues cited by Fed critics—such as high inflation and financial instability—have failed to materialize.

``The Fed's actions were effective, necessary, appropriate, and very much in keeping with the traditional role of the Fed and other central banks,'' said Powell, an investment banker with strong credentials in Republican financial circles.

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His comments are the latest in a Fed effort to push back against ideas that Fed officials fear would represent a dangerous intrusion of politics into U.S. monetary policy.

Though described as a plan to ``audit'' the Fed, the proposals could go much deeper than a review of the central banks books and spending. Rather, Fed officials worry legislation may force the central bank to justify its decisions to Congress and, in some versions, force them to follow a tightly prescribed rule in setting monetary policy.

Central bank officials say it is critical that in setting monetary policy they remain independent from political influence and be allowed to exercise professional judgment.

While the Fed's massive bond purchases and other actions were ``extraordinary,'' Powell said, ``they were taken because the threats posed by the crisis were also without precedent.''

The stakes in the debate over the Fed arguably increased with the Republican victory in November congressional elections, and Fed officials have amped up their rhetoric against a suite of ideas offered by Republicans that would change how the central bank operates.

Last September, a bill that would require a full GAO Office audit of the Fed sailed through the house on a 333-92 vote. Republicans now control both legislative chambers, and Fed transparency is expected to be high on the agenda of new Senate Banking, Housing and Urban Affairs Chair, Richard Shelby.

Republican Senator Rand Paul, a potential 2016 presidential candidate, re-introduced his audit the Fed bill last month.

The Fed is subject to various audits, including reviews of its operations by the GAO. But since 1978, its monetary policy discussions have been legally exempt from GAO oversight.

Fed Chair Janet Yellen last year called an audit of monetary policy a ``grave mistake'' at a congressional hearing. While several Fed regional bank presidents have spoken out against an audit since late last year, Powell is the first Fed governor to specifically address the issue in a speech since the audit movement resurfaced last summer.