Recent comments from Elon Musk suggest his Department of Government Efficiency (DOGE) Team has its eye on the Federal Reserve. “All aspects of the government must be fully transparent and accountable to the people,” Musk said on X. “No exceptions, including, if not especially, the Federal Reserve.”
Musk’s interest in the Federal Reserve is not new. He has previously described the Fed as “absurdly overstaffed” with “a crazy-high number of employees.” He complained about the Fed’s ongoing rate hikes in late 2022 and early 2023, warning that they would “trigger severe recession.” He called for the Fed to “drop rates” in August 2024, believing they had been “foolish not to have done so already.” Musk has even joked about “replacing the Fed with a Magic 8-Ball.” Now, as head of DOGE, he appears to be in a position to address his concerns.
Others have tried — and failed — to reduce the Fed’s discretionary power by requiring additional oversight. Since 2009, eleven Federal Reserve Transparency Act bills have been introduced in Congress. Nearly all of these “Audit the Fed” bills (as they are more commonly known) were sponsored by members of the Republican Party. And all of them ultimately failed. But a popular president, who was critical of the Fed in his first term, and a billionaire entrepreneur, who is intent on overhauling the federal bureaucracy, may be able to accomplish what others could not.
What would auditing the Fed entail? Currently, the Federal Reserve undergoes both internal and external audits, including regular reports from the Government Accountability Office (GAO). Presumably, those who sponsored “Audit the Fed” bills in the past or intend to do so in the future want to accomplish something that is not already being done.
There are three possible interpretations of “Audit the Fed.” The first, most literal interpretation would expand the scope of existing accounting audits for the Fed. But most calls to “Audit the Fed” appear to go beyond the mere expansion of existing audits. The second would involve “auditing” how the Fed conducts monetary policy. For instance, the Transparency Act of 2021, proposed by Sen. Rand Paul, aimed to empower the GAO to audit the Fed’s “deliberations and actions on monetary policy matters” and “transactions made under the direction of the Federal Open Market Committee (FOMC).” Currently, the GAO is prohibited from auditing monetary policy. In this way, the recent bill clearly sought to monitor monetary policy decisions. Lastly, a third interpretation equates “Audit the Fed” with the call to “End the Fed,” a stance popularized by former Rep. Ron Paul (father of the current senator), who sponsored early “Audit the Fed” bills. In practice, these interpretations can be interconnected: a congressperson might advocate auditing the Fed’s monetary policy because it is currently incurring large financial losses or with the ultimate goal of ending the institution.
Suppose Congress were to authorize an audit of the Fed’s monetary policy. Who would conduct the audit? Since GAO is not allowed to do it, it will most likely fall under Congressional oversight. For instance, an audit might be initiated by the Senate Committee on Banking, Housing and Urban Affairs, the House Financial Services Committee, or a joint committee composed of members of each. It is not clear, however, that members of these committees are well-suited to conduct such an audit. Nor is it clear whether members of Congress would be able to ignore short-term, partisan political pressures while auditing the Fed.
The real risk in passing an “Audit the Fed” bill lies in the high likelihood (or even certainty) of politicizing monetary policy even more. This would place economic decision-making into the hands of political figures who may lack the necessary expertise to manage it effectively. Further political capture of the Fed could lead to instability and undermine the Fed’s primary role in maintaining economic stability. The Fed’s ability to conduct monetary policy effectively requires credibility, a component at risk should monetary policy become a new political tool for Congress.
Despite the risk of further politicization, auditing the Fed’s monetary policy may be worthwhile. Levin and Skinner (2023) believe the Fed is currently undersighted. For instance, even as a government entity, the Fed is not required to observe generally accepted accounting principles and practices. This allowed the Fed to create a “magic asset” to account for prospective future earnings when current earnings become insufficient. In simple terms, “deferred assets” track the Fed’s economic losses. The estimated cost to taxpayers of current Fed losses is estimated on the order of $1.6 trillion. Current Fed oversight — or, rather, the lack thereof — allows the institution to impose costs on taxpayers without submitting a cost-and-benefit analysis to Congress and, indeed, without Congressional approval.
Another case of undersight is the constraint on the application of the Inspector General Act of 1978. Federal departments and major agencies are typically assigned an Inspector General (IG), who has full authority to conduct internal reviews. The IG reports to the agency head and can be removed by the President. However, the “Fed’s monetary policy and programs are […] exempted from the Inspector General Act of 1978” (Levin and Skinner). But in 1978, Congress created quasi-independent OIGs to oversee designated federal entities (DFE), including the Fed’s Reserve Board of Governors. The IG at a DFE is an employee of the DFE, not a presidential appointee. For DFEs headed by a Board, like the Fed, the IG is appointed by the governing board (in the case of the Fed, by the Board of Governors’ Chair). Among most of these entities, the IG budget is still coming from the Office of Inspector General. The “sole exception is the Fed Board, which determines its OIG’s budget” (Levin and Skinner). In the case of the Fed, because the IG is assigned to the Board of Governors, its scope of authority does not include the FOMC. Without statutory authority to evaluate the FOMC, the IG would need a specific directive from the Board to do so.
While the arguments for “Audit the Fed” bills may rest on the principle of transparency, they pose significant risks to the Fed’s independence. If monetary policy becomes subject to direct political oversight, it could compromise the Fed’s ability to act in the long-term interest of the economy, ultimately risking the well-being of the financial system and the public. To mitigate this risk, Congress could insist that the Fed adopt standard accounting principles, and revise the rules related to the Fed’s IG to more closely resemble the IGs of other departments and agencies. Such an approach would provide meaningful oversight, without further politicizing the Fed.