Federal Reserve Chair Jerome Powell has voiced concerns that proposals to “audit the Fed,” recently advocated by Elon Musk and others, are a step toward “eliminating” the central bank and threaten its independence.
Musk, a prominent influencer and advisor to President Donald Trump, recently revived a decades-old debate regarding oversight of the nation’s central bank. He used social media to call for a Fed audit leading up to Powell’s congressional testimony this week.
While the Government Accountability Office (GAO) regularly audits the Fed’s activities, these audits do not extend to the central bank’s monetary policy decisions.
Powell argues that deeper investigations into monetary policy decisions, as advocated by figures like former Congressman Ron Paul, would undermine the Fed’s ability to function independently. “The threat would be…you’d have investigations into decisions on monetary policy. And that would be a different thing,” Powell said. “I think it was designed by its designer to be a step on the way to eliminating the Fed.”
This debate is unfolding amidst a broader push to reduce the size and scope of the federal government, with some agencies, such as the Consumer Financial Protection Bureau (CFPB), facing significant curtailment of operations.
Independence Key to Monetary Policy
The core of the debate centers on whether the Federal Reserve should operate free from political interference. Congress has tasked the Fed with managing monetary policy to maintain low inflation and high employment, primarily through adjustments to the fed funds rate.
Powell contends that the Fed must be shielded from political pressure, as presidents may be tempted to push for lower interest rates to boost the economy during their time in office, potentially leading to long-term inflation risks. President Trump has repeatedly called for the Fed to lower interest rates and asserted that the president should have greater influence over the Fed’s decisions.
Numerous studies have demonstrated that central banks operating independently from their governments are more effective at controlling inflation than those with less autonomy.
A Long-Standing Debate
The push for auditing the Fed dates back to the early 2000s, spearheaded by Ron Paul, who advocated for a full audit of the Federal Reserve and even introduced legislation to that effect in 2012. Paul, a proponent of abolishing the Fed and returning to the gold standard, argued that the central bank’s monetary policy causes inflation.
Since then, various Republican lawmakers have introduced similar bills to audit the Fed, none of which have been enacted.
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