This gives the Fed more latitude not to tighten when inflation rises for transient reasons – say, due to a short-lived spike in oil prices – and more scope to ease credit to support the economy during economic downturns. Recognizing these benefits, Congress wisely acted many years ago to exempt monetary policy decisions from the GAO’s wide powers to review Federal Reserve activities. Congress’ decision to bolster the Fed’s monetary policy independence has been followed by similar actions around the world – substantial independence for the central bank in the conduct of monetary policy is now widely regarded as international best practice. Policy independence does not absolve the Federal Reserve from accountability for its monetary policy decisions and the need to clearly explain why they were taken. But it avoids the politicization of monetary policy decision-making. And this is good because politicized central banks generally do not have enviable records with regard to inflation, economic growth or currency stability. Risk premia on financial assets are typically much higher in countries with politicized central banks. Of course, a reversal of Congress’s earlier decision would not amount to legislative control over monetary policy decisions. That’s not the issue. The issue is that a reversal of Congress’ earlier decision could create the appearance that the legislature seeks to influence monetary policy decisions by establishing a mechanism to publicly second guess those decisions. Such a move would blur what has been a careful separation of monetary policy from politics.

Market confidence here and abroad in the Federal Reserve would be undermined. Asset prices could quickly build in an added risk premium, which might lead to tighter credit conditions. These unintended consequences would undermine the legislation’s intent. I’m also concerned about those proposals under consideration that would move the regulatory and supervisory functions now held by the Federal Reserve to other agencies, new or existing. At present, the Federal Reserve is the consolidated supervisor for bank holding companies, a group that has expanded recently as investment banks and other companies formerly outside the Federal Reserve’s purview have been brought under Federal Reserve oversight. In my view, further disaggregation or fragmentation of regulatory oversight responsibility is not the appropriate response to our increasingly interconnected, interdependent financial system. Funneling information streams into diverse institutional silos leads to communication breakdowns and too often to failure to “connect the dots.” In addition, there are clear synergies between the supervisory process and the Federal Reserve’s monetary policy and financial stability missions. The information we collect as part of the supervisory process gives us a front-line, real-time view of the state of the financial industry and broader economy. Monetary policy is more informed as a result. Only with this knowledge can a central bank understand how the monetary policy impulse will be propagated through the financial system and affect the real economy. Similarly, involvement in the supervisory process gives us critical information in fulfilling our lender-of-last-resort responsibilities.