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Here's a solution for the Fed

A proposal to audit the Federal Reserve's monetary-policy decisions has attracted a healthy level of sponsorship in Congress. But an audit may not be the best solution.

In her testimony last month, Chairwoman Janet Yellen argued that "Audit-the-Fed is a bill that would politicize monetary policy; it would bring short-term political pressure to bear on the Fed." She noted that the Fed is "one of many, many central banks that are independent, and academic studies, I think, established beyond the shadow of a doubt that independent central banks perform better. The economies are more stable and have better performance in terms of inflation and macroeconomic stability."

People walk into a meeting of the Board of Governors at the Federal Reserve in Washington DC.
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People walk into a meeting of the Board of Governors at the Federal Reserve in Washington DC.

Acknowledging the legitimate concerns of legislators for more oversight while maintaining central bank independence may not be incompatible goals. The Federal Reserve can address lawmakers' concerns without submitting to an audit. The solution lies in the structure of the Federal Reserve System, which comprises 12 regional Federal Reserve banks and the Board of Governors. The Federal Open Market Committee (FOMC) is comprised of all seven members of the Board of Governors (which includes the chair), the president of the Federal Reserve Bank of New York and a rotating group of four of the other eleven regional Fed presidents.

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One reasonable compromise may be to alter the rules of organization for the FOMC and expand the voting members to include all of the regional bank presidents. Each regional Federal Reserve bank has a president that was appointed by an independent regional board which includes representatives from banking, business interests and the interests of the public at large.

Because regional Fed presidents are not appointed by the Board of Governors and do not need to be confirmed by Congress, regional bank presidents are typically considered to be the more independent voices within the Federal Reserve system. Indeed, history has shown that the majority of monetary policy dissents on the FOMC have come from the regional bank presidents.

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Such a move could act as an internal check on the power of the Federal Reserve system. Consider that, at full strength, the current committee is designed to have 12 members, two-thirds of which are either members of the Board of Governors (appointed by the president and confirmed by the Senate) or the president of the Federal Reserve Bank of New York (who by tradition votes with the chair). Expanding the voting membership to include all the regional presidents would increase the committee size to 19 and shift the majority of the votes toward the more independent regional bank presidents.

Retiring Dallas Fed President Fisher has offered his own proposal that would eliminate the New York Fed's permanent voting spot in favor of the other regional banks. However, it would seem preferable from a policy coordination perspective to have the New York Fed retain its permanent vote so that the operational arm of the system always has a say in policy. Empowering the full slate of regional banks would achieve the same goal Fisher desires without possibly creating additional operational uncertainty.

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Although there may be concern that this change would not provide enough additional oversight, empowering those at the Fed who are more closely tied to the public at large can only serve to boost the Fed's credibility with Congress and with the public. The Federal Reserve should immediately expand the voting membership of the FOMC. This expansion of voting rights would acknowledge the concerns raised by those favoring an audit of the committee while maintaining the independence of the central bank.

Commentary by Drew Matus, a managing director and deputy chief U.S. economist at UBS. Prior to UBS, he was a senior economist at Bank of America-Merrill Lynch and the senior financial markets economist for Lehman Brothers. He has also worked at hedge fund Moore Capital Management and the Open Market Desk of the Federal Reserve Bank of New York. Follow UBS on Twitter @UBSamericas.