CONGRESS this year is taking on many difficult tasks, including deficit reduction, campaign-finance reform, health-care reform, even reform of Congress itself. It should also enact long-needed reforms in the Washington institution that controls monetary policy: the Federal Reserve.
The health of our economy and the strength of our nation are strongly influenced by fiscal and monetary policies made in Washington. Those who decide fiscal matters - the president and Congress - are accountable to the voters. When Congress debates policy, it does so in the open. The decisions we make are immediately reported to the American people.
Every penny the government spends is accounted for in the federal budget; every government agency is subject to audit and review by the General Accounting Office (GAO). But the Federal Reserve is not held to the same standards. It does not conform to the normal rules of government accountability. Its decisions are made in secret and revealed only after long delay. It is not required to consult with Congress or the White House before setting money-supply or interest-rate targets.
The president, who is held responsible for the performance of the economy, must wait until late in his term to appoint a chairman of the Federal Reserve Board. Congress has no jurisdiction over the Federal Reserve's budget and gets little information on its spending. The presidents of the 12 Federal Reserve banks, along with the Fed's seven-member board of governors, make up the Federal Open Market Committee (FOMC) and vote on monetary-policy decisions. But unlike the governors, the presidents are neithe r appointed by the White House nor confirmed by the Senate. And even though the Fed engages in more than $1 trillion in financial transactions each year, most of these are exempt from GAO audit.
Joint Economic Committee chairman Rep. David Obey (D) of Wisconsin and I have introduced two bills that would make the Fed more accountable without jeopardizing its independence and its ability to conduct monetary policy free of political pressure. The bills make some modest changes in the Fed's practices and procedures. These include:
* The Fed and the president's top economic advisers would be required to meet three times a year to consult on monetary and fiscal policy.
* The president could appoint a new Fed chairman, with the advice and consent of the Senate, one year after taking office.
* The Fed would have to announce immediately any changes in monetary policy, including changes in interest rates.
* The presidents of the Federal Reserve Banks, who are appointed largely by bankers, would be made advisers rather than voting members of the FOMC.
* The Fed would have to print its annual budget in the US government budget, and the GAO would be given more responsibility to audit the Fed.
Sens. Paul Sarbanes (D) of Maryland and Byron Dorgan (D) of North Dakota have introduced similar bills in the Senate. The bills will not reduce the independence of the Fed or inject politics into monetary policy. They do not impose presidential, congressional, or other outside controls on Fed policy. Instead, they would create a formal channel of communication between the president and the Fed and provide Congress and the American people with more and better information on Fed policies and procedures.