A:

Contrary to conventional wisdom, the Federal Reserve is extensively audited. Politicians on the left and right of a populist bent often attack the Federal Reserve as being an entity without any checks and balances, but this attack is inaccurate. The Federal Reserve is quite transparent, and there are many layers of auditing to ensure that it continues to work for the public good.

Auditing Process

Each regional Federal Reserve Bank has internal auditors who directly report to the bank's board of directors in the same way that large corporations have independent auditors. Additionally, each regional bank is overseen by the board of governors, adding another layer of oversight.

The Federal Reserve gives extensive detailed reports of its activities and its impacts on a macro and a micro scale. Internal and external auditors audit these statements before release. Congress also has oversight over the Federal Reserve through the Government Accountability Office (GAO). Periodically, the GAO audits at random regional Fed banks to ensure its integrity.

A final check on the Federal Reserve is through the nominating and approval process for the Board of Governors, which ensures that Congress and the executive branch have control over the key members of the Federal Reserve system. In turn, the board of governors has oversight over the entire system, including regional Fed banks, budgets, personnel and monetary policy.

Importance

The auditing process is crucial to the function of the Federal Reserve and the entire economy. At the heart of the financial system is faith in bank deposits. If people do not trust the banks, then capitalism does not work. The Federal Reserve's primary purpose is to be the lender of last resort and prevent bank runs.

If there is a loss of faith in the Federal Reserve's ability to do this, then the entire financial system is at risk of crumbling. The auditing process is crucial for the public to retain faith in the Federal Reserve's ability to be the backstop of the financial system, which is essential for the stability of the economy.

Transparency

The Federal Reserve has increased transparency under the tenure of Federal Reserve Chairman Ben Bernanke. Part of this has to do with the extraordinary steps taken during the financial crisis, in which the Federal Reserve opened its discount window to all sorts of institutions and began outright purchases of debt, such as commercial paper, mortgages and Treasurys. These steps were necessary, given the severity of the crisis.

It naturally led to questions about the Federal Reserve. In response, Fed Chairman Bernanke began taking questions from the press every three months. Additionally, he encouraged open discussion among Fed governors and allowed them to share dissenting views with the public. Minutes of Fed meetings are published as well. In effect, he pulled back the curtain to show the inner workings of the Federal Reserve system. The Fed has also moved towards making decisions that are data-dependent, which adds another level of transparency to the Federal Reserve.

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