Fed Faces Pressure Over Accountability Amid Trump Threats
The Federal Reserve plays a crucial role in shaping the US economy, affecting interest rates, inflation, and bank regulation. Despite its significant influence, critics on both sides of the political spectrum have raised concerns about the Fed's accountability to Congress and the public.
New Fed Chair Kevin Warsh faces challenges from President Donald Trump, who has pressured the Fed to cut interest rates and is trying to oust one governor. The Fed's expanded activities since the 2008 financial crisis, including private-sector lending and large-scale purchases of government securities, have sparked calls for greater scrutiny.
A more accountable Fed may be a more defensibly independent one, argue scholars of central banking and finance. However, defining what this accountability means is a challenge. The Humphrey-Hawkins Act of 1978, which required the Fed chair to report to Congress twice a year, was a step towards greater oversight.
The Fed's self-financing status, governor term limits, and inspector general appointment process make it an outlier among federal entities. Critics have summarized this regime as 'undersight' rather than oversight. The debate over Fed accountability has taken on new dimensions since the 2008 financial crisis, which catalyzed a historic expansion of its activities.
Economists like Andrew Levin argue that comprehensive General Accountability Office audits would have flagged trade-offs about Fed decisions such as bond buying. Others, like former Fed Vice Chair Donald Kohn, are more cautious, believing external evaluations won't necessarily threaten Fed independence as long as they're not used to justify political interference in monetary policy.