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The worst Fed idea yet

One would be hard-pressed to identify the worst political ideas to come from this presidential campaign. But, from purely an economic perspective the calls to "audit the Fed" are a clear winner — or more appropriately, a clear loser.

The frightening part of this particular movement is that nearly all the leading presidential contenders — Donald Trump, Bernie Sanders, Marco Rubio and Ted Cruz — have all endorsed a form of auditing the U.S. central bank. Secretary of State Hillary Clinton is virtually alone in not endorsing such populist rhetoric. A bill to audit the Federal Reserve, co-authored by unlikely bedfellows Rubio and Sanders, failed to gain approval this past January in the Senate.



Janet Yellen, Chair of the Federal Reserve.
Getty Images
Janet Yellen, Chair of the Federal Reserve.

To clarify, the Fed's financial statements are audited — by Deloitte and Touche. What is meant by auditing the Fed in this context is simply more oversight of the Fed by the White House and Congress. This would allow the Government Accountability Office to evaluate the Fed's monetary policy decisions.

The danger of such a program is that lawmakers would be able to put pressure on the Fed to, for instance, to "prime the pump" at key times — say, in an election year — to the benefit of the incumbent party. The potential for abuse is staggering.

Advocates calling for more Fed oversight act as if there is no accountability for the Fed. In fact, members of the Federal Reserve Board are nominated by the president and confirmed by the Senate. The Fed is required to semiannually report to Congress. Who can forget the riveting testimony of a mumbling Alan Greenspan uttering the phrase "irrational exuberance?"



The Fed is perhaps the easiest of all targets for disgruntled voters and candidates looking for scapegoats. After all, the Fed is an obtuse institution and monetary policy is excruciatingly difficult to comprehend for the average citizen. But, the claims that an unfettered Fed is responsible for the country's economic woes is misplaced.

Some perspective is in order. In March of 2009, the S&P 500 closed at 676.53 and many market pundits believed we were all going to be hunter gatherers. Seven years later the index stood at over 2000 and we are experiencing one of the longest bull markets in history. Unemployment is down and economic growth, while anemic is accelerating. By most accounts, the Fed has done a masterful job of helping navigate the economy from the depths of the financial crisis.


A recent Gallup poll found that respondents ranked Congress as the second least trustworthy profession (narrowly defeating car salesmen). While I do understand populism, I simply can't figure out why giving more control to an untrusted Congress is the answer to "fixing" an unbroken monetary policy.

While the odds of electing a president who advocates more Fed oversight has increased in the past several months, it could be much worse. One time presidential hopeful Rand Paul called for a complete elimination of the Fed and a return to the gold standard. I hope Donald Trump isn't listening.



Commentary by Robert R. Johnson, president and CEO of The American College of Financial Services, a non-profit, accredited, degree-granting institution in Bryn Mawr, Pa. He is also co-author of "Invest with the Fed" (2015). Follow him on Twitter @BobAmericanColl.