Academic journal article Federal Reserve Bulletin

Statement by William J. McDonough, President, Federal Reserve Bank of New York before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 27, 1993

Academic journal article Federal Reserve Bulletin

Statement by William J. McDonough, President, Federal Reserve Bank of New York before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 27, 1993

Article excerpt

I welcome the opportunity to appear before the committee today to provide my views on the provisions of H.R.28, the Federal Reserve System Accountability Act of 1993, which relate to the audit of Reserve Banks by the Government Accounting Office. H.R.28 would eliminate the exemptions in the Federal Banking Agency Audit Act for foreign central banks and government transactions, monetary policy deliberations, decisions, and actions, and Federal Open Market Committee (FOMC) transactions. Governor Angell will be addressing the concerns of the Board of Governors on this legislative proposal. I will focus on the implications of the proposal for the actions taken by the Federal Reserve Bank of New York in implementing FOMC decisions and carrying out activities for our foreign accounts.

I want to comment on the scope of the current exemption and to make clear to the committee my appreciation and respect for the audit process. Also, I would like to take this opportunity to note steps that can be taken to further ensure the effectiveness of GAO audits of the Bank, within the GAO's current authority. In my opinion, that authority provides sufficient scope to address many of the concerns you have asked me to discuss today.

I believe that the elimination of the current exemption would interfere with the Federal Reserve's ability to formulate and execute an optimal monetary policy. It would introduce the unmistakable potential for political influence; every movement and nuance of policy would then have to be examined in tight of that potential. At the core of my concern is the fact that the process by which we implement monetary policy is inextricably entwined with the policy itself. For example, questions regarding the volume of open market operations may appear on the surface to be questions of efficiency. In fact, they relate to the policy intent to avoid undue volatility in the markets. The idea that the process of executing open market operations may be audited without imposing judgments about the policy itself is simply not realistic.

Simply put, optimal monetary policy is achieved only when the public and the markets perceive no short-term political influence. This issue is not new, nor is it a new conclusion on my part. I have had plenty of opportunity to consider the import of the exclusion of the GAO from auditing monetary policy in my former role as manager of both the domestic and foreign open market accounts. I have no doubt that the potential for damage to a credible and effective monetary policy would be very real if the exclusion were to be lifted. This potential for damage would clearly outweigh any possible benefit to the public from GAO audits of monetary policy operations.

I feel equally strong!y about the impairment of our policy implementation if the exclusion were to be lifted on the foreign side. Foreign exchange intervention is conducted not only in conjunction with the Treasury, through the Exchange Stabilization Fund, which is exempt from GAO audit, but also frequently with or on behalf of foreign central banks and monetary authorities.

We hold a very large amount - more than $300 billion at present - of marketable U.S. government securities, representing dollar reserves of these official foreign entities. I cannot presume to gauge the response of all of these central bank governors and finance ministers, but I can tell you with absolute certainty that some number of them, and perhaps a large number, would question the appropriateness of their reserve activity being scrutinized by the GAO and the Congress. This would almost certainly be damaging to the relationships that are so central to international monetary cooperation and, perhaps, to the role of the dollar. Certainly, it would impair the ability of the U.S. monetary authorities to conduct their foreign exchange intervention policies on a coordinated basis with the same effectiveness and efficiency we enjoy today. …

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