What Economists Think about ‘Audit the Fed’

Let’s face it—no matter what the Federal Reserve does, it gets a lot of flack. As the government body tasked with keeping employment high and interest rates low, every decision it makes irritates someone. But old decisions are in the past. What is of even greater interest to most Americans in this wobbly economy is: What will the Fed do next?

This month, two questions about the future of the Federal Reserve were posed to the IGM Economic Experts Panel, a group including Nobel laureates and other internationally recognized economists. The first question was whether a Senate bill to allow the Fed to be audited would increase its legitimacy. The answer from the panel was a decisive no.

Since 2009, Kentucky Senator Rand Paul has been trying to make the Federal Reserve more transparent because he sees it as the chief culprit behind the nation’s economic problems.

“The Fed’s operations under a cloak of secrecy have gone on too long and the American people have a right to know what the Federal Reserve is doing with our nation’s money supply,” the senator said when he introduced his legislation.

But nearly 70 percent of IGM experts disagree with Paul and with the notion that the Fed should lose any of its independence. Robert Hall of Stanford strongly disagreed. “The existing system of an independent Fed acting with finality has worked well,” he said. “There’s nothing to be gained from such an audit.”

Janet Currie of Princeton also disagreed. “It is important for the Fed to be able to operate with a minimum of political interference,” she commented.

The second question was whether the Fed should continue to purchase mortgage-backed securities and treasuries until there is sustained employment growth. Here, there was some dissent among the panelists. Nearly 20 percent were uncertain, but more than half want the bank to keep buying.

Since the economic collapse in 2008, the Fed has been purchasing assets to bolster the private sector. Today, the Fed has more than $3 trillion on its balance sheet, which is a lot more than originally planned. Still, the majority of IGM economists want the buying to continue.

William Nordhaus of Yale voted in support of the Fed’s current buying policy. “[It] should continue until we are on a trajectory that would lead to high employment in two to three years,” he commented.

Nevertheless, nearly 11 percent of the panel voted to stop buying mortgage-backed securities. Anil K Kashyap of Chicago Booth, who disagreed with the continuation of the policy, cautioned that the “benefit of more quantitative easing now seems small…The forward guidance [in regard to this policy] is creating some financial stability risk.”