Congress Must Increase Oversight and Hold Fed Accountable 

Over the past few years, American families and households have suffered from record inflation, high interest rates, and rising credit card delinquencies. These trends stem from the Federal Reserve’s post-pandemic policy mismanagement. Despite this reality, the Fed has engaged in self-indulgence, rewarding its incompetency by spending billions on opulent renovations and a new headquarters.  

In 2024, the Fed posted an operating loss of $77.6 Billion. This is because the Fed now pays more interest on excess reserves held by banks than it collects from its multi-trillion bond portfolio. It is indeed strange how an institution credited with creating money is somehow managing to lose it in volumes that would drive mature corporations to bankruptcy.  

Taxpayers will ultimately bear the cost of the Fed’s mistakes. Historically, the Fed remits profits to the Treasury General Account (TGA), reducing taxpayer burden. Under the new monetary regime of excess liabilities weighing down the Fed’s balance sheet, taxpayers will have to contribute more to offset the Fed’s shortfall.  

Reform and additional oversight at the Fed are long overdue. Proponents of auditing the Fed have sounded the alarm for years on the lack of accountability the Fed faces. A study conducted by the Independent Review found Fed economists overwhelmingly lean left. Democrats outnumber Republicans approximately 10-1. Considering this in the context of the Fed’s profligate spending and aggressively interventionist policy stance, it is reasonable to suspect the employees’ political leanings and agency policy. 

The Fed has been happy to push up regulatory and compliance costs for banks. The agency began importing bank capital requirements based on the Basel III guidelines following the Global Financial Crisis. It is also part of a consortium of financial institutions comprising the Basel Committee, whose members also include the central banks of China and Russia. The committee, which is part of the Bank for International Settlements (BIS), issues non-binding regulatory guidance. Congress has not created any legislation authorizing the Federal Reserve’s collaboration with the Basel committee, let alone its implementation of Basel III. Yet, the pending Basel III endgame proposal would further heighten capital ratio requirements potentially costing $13 billion for Global Systemically Important Banks (G-SIBs) in the US.  

These rules, among others, are not without cost, and ultimately hurt consumers as well as the wider economy. A study from the Philadelphia Federal Reserve indicates that each additional percentage-point in mandatory capital ratio requirements raises lending rates 5–15 basis points and slows GDP growth by 0.15–0.6 percent. 

The Fed’s role in conducting monetary stimulus has made the banking system hypersensitive to rate hikes and policy measures needed to curb inflation. According to models published by the New York Fed, the neutral rate, or the interest rate believed to neither increase nor decrease economic activity, has declined over the years and currently sits around 1.5%. Several rounds of quantitative easing and years of ultra-low interest rates have complicated adjusting to a rate environment reflecting the pre-financial crisis era. This was seen in 2023 when interest rate risk contributed to a string of regional bank collapses.  

In addition to monetary policy, the Fed dropped the ball on regulatory enforcement and supervision. Silicon Valley Bank’s (SVB) collapse in 2023 highlighted how the Fed failed to follow its most basic responsibilities.  SVB failed an internal liquidity stress test and failed to follow up. The Fed did not prioritize tangible financial risks and instead opted to defer an interest rate risk assessment to the 3^rd quarter of 2023 in favor of governance exams. A Government Accountability Office (GAO) report from 2015 found that the Fed missed opportunities to provide earlier attention and support during the 2008 financial crisis. These issues point to a lack of initiative and efficiency problems within the Fed.  

The Fed’s failure to do its most basic tasks should raise significant concerns, especially considering that the Fed is overstaffed and overcompensated relative to the private sector and other government employees.  

Other central banks are subject to oversight and accountability. The European Central Bank and Bank of England report to independent bodies charged with overseeing their performance and auditing their activities. The Fed should face scrutiny for its repeated policy and regulatory failures. The Government Accountability Office (GAO) should be empowered by Congress to regularly audit the Fed to ensure the agency adheres to its statutory duties and is not influenced by partisan agendas from within.  

Congress must hold the Fed accountable for its policy decisions, regulatory failures, and reckless spending. Congress wrote the Fed into existence, and Congress can reassert control. It is ill-conceived for lawmakers to enable an agency as poorly run as the Fed to continue operating without a major overhaul.