A recent article from the Hill suggests that the GAO will be able to audit the Federal Reserve under its new powers gained as part of the Dodd-Frank Financial Reform Act. While this would be a strong step forward in bringing transparency to the Fed, history has shown that the Fed will not allow these audits to begin without a fight.
For decades the Federal Reserve has fought efforts by legislators to require the Fed to undergo an audit of how it operates and how it manages our monetary system. In the last Congress, these efforts were led by Rep. Ron Paul (R-TX) and Sen. Bernie Sanders (I-VT), who proposed legislation mandating a thorough audit of the Federal Reserve. The proposal would have eliminate many exemptions in the current annual audit and include a wider examination of the Fed’s operations. This legislation did not gain passage.
In opposing the audits, the Fed argues that significant economic harm could occur if certain financial information about the institutions it is working with becomes public. The Fed officials argue the market would attach a stigma to institutions receiving loans or other assistance from the Fed, and if the names of those banks—or their financial condition—were revealed, bank panics could ensue.
Not all experts share these fears. In a previous article for Heartland’s Finance, Insurance and Real Estate News, supporters of the audits argue that the market needs to know what the Feds actions are to clear out inefficient investments and allow the economy to grow.