donald l kohn : federal reserve independence testimony by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, before the subcommittee on domestic monetary policy and technology, committee on financial services, us house of representatives, washington dc, 9 july 2009. * * * chairman watt, ranking member paul, and other members of the subcommittee, i appreciate the opportunity to discuss with you the important public policy reasons why the congress has long given the federal reserve a substantial degree of independence to conduct monetary policy while ensuring that we remain accountable to the congress and to the american people. in addition, i will explain why an extension of the federal reserve ’ s supervisory and regulatory responsibilities as part of a broader initiative to address systemic risks would be compatible with the pursuit of our statutory monetary policy objectives. i also will discuss the significant steps the federal reserve has taken recently to improve our transparency and maintain accountability. independence and accountability a well - designed framework for monetary policy includes a careful balance between independence and accountability. a balance of this type conforms to our general inclination as a nation to have clearly drawn lines of authority, limited powers, and appropriate checks and balances within our government ; such a balance also is conducive to sound monetary policy. the federal reserve derives much of the authority under which it operates from the federal reserve act. the act specifies and limits the federal reserve ’ s powers. in 1977, the congress amended the act by establishing maximum employment and price stability as our monetary policy objectives ; the federal reserve has no authority to establish different objectives. at the same time, the congress has – correctly, in my view – given the federal reserve considerable scope to design and implement the best approaches to achieving those statutory objectives. moreover, as i will discuss in detail later, the independence that is granted to the federal reserve is subject to a well - calibrated system of checks and balances in the form of transparency and accountability to the public and the congress. the latitude for the federal reserve to pursue its statutory objectives is expressed in several important ways. for example, the congress determined that federal reserve policymakers cannot be removed from their positions merely because others in the government disagree with their views on policy issues. in addition, to guard against indirect pressures, the federal reserve determines its budget and staff, subject to congressional oversight. thus, the system has three essential components : broad objectives set by the congress, independence to pursue those legislated objectives as efficiently and effectively as possible, and

financial markets. these responsibilities and close working relationships have not impinged on our monetary policy independence, and we do not believe that the enhancements proposed by the administration to the federal reserve ’ s supervisory and regulatory authority would undermine the federal reserve ’ s ability to pursue our monetary policy objectives effectively and independently. the federal reserve's payment system risk policy can be found at http : / / www. federalreserve. gov / paymentsystems / psr / default. htm. indeed, these enhancements would complement the federal reserve ’ s monetary policy responsibilities. the federal reserve and other central banks have always been involved in issues of systemic risk, most notably because central banks act as lenders of last resort. central banks, which operate in markets daily and have macroeconomic responsibilities, bring a broad and unique perspective to analysis of developments in the financial system. and, as we have seen over the past two years, threats to the stability of the financial system can have major implications for employment and price stability. thus, the federal reserve ’ s monetary policy objectives are closely aligned with those of minimizing systemic risk. to the extent that the proposed new regulatory framework would contribute to greater financial stability, it should improve the ability of monetary policy to achieve maximum employment and stable prices. accountability and transparency in a democracy, any significant degree of independence by a government agency must be accompanied by substantial accountability and transparency. the congress and the federal reserve have established a number of policies and procedures to ensure that the federal reserve continues to use its operational independence in a manner that promotes the nation ’ s well - being. the federal reserve reports on its experience toward achieving its statutory objectives in the semiannual monetary policy reports and associated congressional testimony. the federal open market committee ( fomc ) releases a statement immediately after each regularly scheduled meeting and detailed minutes of each meeting on a timely basis. we also publish summaries of the economic forecasts of fomc participants four times a year. in addition, federal reserve officials frequently testify before the congress and deliver speeches to the public on a wide range of topics, including economic and financial conditions and monetary and regulatory policy. our financial controls are examined by an external auditor, and reserve bank operations and controls are reviewed by each reserve bank ’ s independent internal audit function and by board staff who oversee reserve bank activities. we provide the public and the congress with detailed annual reports on the consolidated financial activities of the federal reserve system that are audited by an independent