Audit would harm country, Fed vice chair warns

Kohn Warns Against Political Interference in Fed

By Alister Bull and Emily Kaiser
Reuters
Thursday, July 9, 2009

http://www.reuters.com/article/companyNewsAndPR/idUSN0945907120090709

WASHINGTON -- Federal Reserve Vice Chairman Donald Kohn on Thursday launched a robust defense of the U.S. central bank's independence and warned that efforts to put monetary policy under political sway would hurt the economy.

Curbing the Fed's independence could both result in higher long-term interest rates and hurt the United States' credit rating, Kohn said.

"Any substantial erosion of the Federal Reserve's monetary independence likely would lead to higher long-term interest rates as investors begin to fear future inflation," Kohn said in remarks prepared for delivery before a congressional committee.

Kohn is due to testify later on Thursday. A copy of his remarks was released before the hearing.

Kohn's testimony comes as Congress debates President Barack Obama's plan for regulatory reform, which envisions the Fed taking on the role of systemic risk regulator, in a bid to fix a system that failed to prevent a financial crisis last year.

The proposal to expand the Fed's powers has increased calls for accountability at the central bank, and a bill put forward by Republican Congressman Ron Paul to expose it to a full audit by a government watchdog has won support from a majority in the House of Representatives.

Kohn said such a move could be highly detrimental.

"The bond rating agencies view operational independence of a country's central bank as an important factor in determining sovereign credit ratings, suggesting that a threat to the Federal Reserve's independence could lower the Treasury's debt rating and thus raise its cost of borrowing," he said.

Kohn said allowing that the Government Accountability Office to audit Fed monetary policy would be a bad mistake.

"The Federal Reserve strongly believes that removing the statutory limits on GAO audits of monetary policy matters would be contrary to the public interest by tending to undermine the independence and efficacy of monetary policy," he said.

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