Sen. Rand Paul (R-KY) recently suggested placing a hold on Janet Yellen's nomination as chair of the Federal Reserve unless the Senate considers the Federal Reserve Transparency Act. Technically the senator cannot block the vote by himself. The cloture rule of the U.S. Senate provides a time limit to debate a measure and prevents endless filibusters. However, this rule requires a vote of three-fifths of the Senate, normally 60 votes. By forcing a cloture vote, Senate Republicans acting together could block an up or down vote on the nomination.
Paul's tactic may be successful and draws attention to the Federal Reserve Transparency Act. But the tactic also provides a distraction to the purpose of the legislation. Media coverage will now focus on Washington dysfunction or shift debate from Federal Reserve transparency to Yellen's qualifications.
Federal Reserve Transparency Act of 2013
The Paul-sponsored Federal Reserve Transparency Act repeals limitations on audits of the Federal Reserve. As the law currently stands it provides detractors clear grounds to question Federal Reserve motivations. From Title 31 Section 714 of the United States Code:
Audits of the Board and Federal reserve banks may not include—
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.
The legislation would strike the above from current law.
The argument against the new legislation is that it impedes the central bank's independence. Federal Reserve supporters argue the ability to scrutinize rate setting decisions and open market motivations would equate to political pressure from the Congress. Current Chairman Ben Bernanke explains in the following clip:
Bernanke raises strong points in support of central bank independence. Admittedly Bernanke has also championed transparency and does provide data on Federal Reserve activities. However in the Constitution the Congress is tasked with creating and valuing money. Through the setting of interest rates and purchasing government securities, the Federal Reserve merely acts as the agent of the Congress to create and value currency. Congress cannot abstain from regulating this process and understanding the "why" behind the Federal Reserve's decisions.
Additionally, as the federal deficit and debt have risen, so too has the need for coordination between fiscal and monetary policy. The Congress is constitutionally responsible for borrowing money and setting fiscal policy. As a major holder and purchaser of federal debt the Federal Reserve is inextricably linked to the deficit spending of the Congress.
Foolish bottom line
Paul's threat to place a hold on Janet Yellen's nomination both draws attention to his Federal Reserve Transparency Act and provides a distraction from it. While central bank independence is needed, current law blocks all substantive oversight of the Federal Reserve. As an agent of the Congress, the Federal Reserve deserves adequate scrutiny.