Senate Majority Leader Mitch McConnell, who backs his fellow Kentucky senator’s presidential bid, scheduled a procedural vote for Tuesday. More than 20 Republican senators, including two others seeking the party’s presidential nomination -- Ted Cruz of Texas and Marco Rubio of Florida -- are co- sponsors. The measure requires 60 votes to advance, though, and Democrats will seek to block it.
“It is no secret that the Federal Reserve’s unchecked printing press causes recessions and increases income inequality," Paul wrote in a Jan. 3 opinion piece on Business Insider’s website. “Their acts can no longer go unchecked.”
Some lawmakers are concerned that the bill would inject politics into the bank’s work, contending the reviews envisioned by Paul could threaten the Fed’s independence. Others insist there needs to be more oversight of the bank’s operations, and not just Republicans. Senator Bernie Sanders, the Vermont independent seeking the Democratic presidential nomination, called for a “full and independent audit of the Fed” in a Dec. 23 New York Times opinion column.
The bill would require a Government Accountability Office audit that could subject the Federal Open Market Committee’s closed-door interest-rate setting deliberations to review. Under current law, such operations are off limits to congressional oversight.
A similar bill passed by the House Nov. 19 drew a veto threat from President Barack Obama’s administration, which said the measure would subject the Fed to political pressures when setting interest rates.
"Its independence is key to its credibility and its ability to act in the long-term interest of the nation’s economic health," the White House said in a Nov. 17 statement about the House bill, H.R. 3189, sponsored by Michigan Republican Bill Huizenga.
"Subjecting the Federal Reserve’s exercise of monetary policy authority to audits based on political whims of members of the Congress -- of either party -- threatens one of the central pillars of the nation’s financial system and economy,” the administration statement said.
Fed Chair Janet Yellen said the Senate bill “would be a grave mistake, detrimental to the economy and the American people.”
The bank’s financial statements are audited annually, she said in a Jan. 8 letter to McConnell and Senate Minority Leader Harry Reid, a Nevada Democrat. The Senate bill “would instead permit the GAO to second-guess the Federal Reserve’s monetary policy decisions and provide recommendations to the Congress for overturning the direction of monetary policy,” Yellen said.
Tuesday’s Senate action comes less than three weeks before the Feb. 1 Iowa caucuses, where Paul will compete with other Republicans in the race to be the party’s presidential nominee. He has been polling in the mid-to-low single digits and is being excluded from the Republican prime-time debate Thursday on Fox Business Network.
Battles over transparency and accountability between the Fed and Congress intensified during the last decade’s financial crisis when then-Chairman Ben S. Bernanke used Depression-era powers to rescue banks, brokerage firms, finance companies and insurers.
Bailouts of financial firms -- and the expansion of the Fed’s balance sheet to $4.48 trillion from $863 billion in April 2007 when the subprime mortgage market began to fail -- stirred populist anger and raised suspicions of government favoritism.
Large investment banks such as Goldman Sachs Group Inc., Deutsche Bank AG and Citigroup Inc. may see more volatility in fixed-income markets if there is additional congressional oversight of monetary policy, according to Nathan Dean, a Bloomberg Intelligence analyst. Representatives of Goldman Sachs, Citigroup and other companies with fixed-income trading desks declined to comment on the legislation.
"From the traders that I’ve spoken to, the idea that Congress will be able to insert its influence over interest rate decisions is a bad one, and one that could make it more difficult to trade," Dean said.
One thing that passage of such a bill could trigger, Dean said, is a stronger push for additional scrutiny of other Fed activities.
For example, mid-size banks, like PNC Financial Services Group Inc., SunTrust Banks Inc., BB&T Corp., Fifth Third Bancorp, Citizens Financial Group Inc. and KeyCorp might be able to gain more insight into how the Fed conducts its stress tests and its Comprehensive Capital Analysis and Review process, Dean said. Under current law, Congress already has the authority to direct the GAO, Congress’s investigative arm, to look into those areas and the GAO would have to agree.
Tea Party Republicans
Many Democrats have expressed concern about the proposal.
"We must respect the independence of the Federal Reserve for the well-being of the global economy,” Reid said on the Senate floor Monday. “This is about giving Tea Party Republicans and their billionaire donors the authority to control even more of the economy of the United States.”
Some Republicans are also skeptical of Paul’s proposal. Senator Bob Corker, a Tennessee Republican and member of the Banking Committee, said during a February 2015 banking panel hearing that legislation to force Fed audits are “an attempt to allow Congress to be able to put pressure on Fed members relative to monetary policy."
The push to expand Fed audits isn’t likely to disappear anytime soon, said Sarah Binder, a senior fellow at the Brookings Institution in Washington who is writing a book about the Fed and Congress.
“The audit proposal has very long roots -- I can find it going back to the 1950s,” Binder said. “There is this enduring question about how much accountability should be imposed on the Fed, and where do you draw the line between accountability and independence.
Kathleen Miller and Craig Torres
The first bill on this year’s Senate agenda is unlikely to become law, but Republican Rand Paul’s proposal to require an audit of the U.S. Federal Reserve will call attention to his presidential campaign just weeks before the Iowa caucuses.