Federal Reserve Board: Needs to Improve Communication with Congress; Former Fed Vice Chair Donald Kohn Offers Suggestions in Op-Ed

Bloomberg published an article about a simmering disagreements between the Federal Reserve Board (Board) and Congress (members of the House Financial Services Committee)

Issues in brief–

  • Federal Open Market Committee leak, involving Medley Global Advisors. The Board has not responded to Congressional requests for information, citing a Department of Justice investigation. However, the Board conducted a previous investigation (in 2012), which was closed without finding any wrongdoing.
  • Reform of the Federal Reserve Act. Chair Janet Yellen feels the current structure of the Board is acceptable, according to the Bloomberg article.

In a Bloomberg View opinion piece, former Board Vice Chair Donald Kohn (with his book’s co-author David Wessel) offered suggestions for better Board communication with Congress. One of the suggestions is for the Board to provide Congress with copies of the Monetary Policy Report several days in advance of the hearings (the document is typically sent to Congress less than 24 hours before the first hearing).

The eight suggestions from Kohn and Wessel follow.

  1. The Fed should volunteer — and Congress should agree — to have monetary policy hearings quarterly, rather than twice a year. If the Fed believes that the economy evolves quickly enough to warrant issuing new projections and taking questions from the media every quarter, then the same reasoning should apply to informing the people’s representatives.
  2. In connection with the hearings, the now semi-annual Monetary Policy Report — or a streamlined version of it — should become quarterly. Among other things, the Fed should share the monetary policy rules that it already consults in its deliberations.
  3. The Fed should publicly release the Monetary Policy Report three days before the relevant hearing, so members of Congress and staff have adequate time to digest it.
  4. The Monetary Policy Report should continue to include the Fed’s assessment of financial stability risks. The intersection of these risks and monetary policy should be one focus of the quarterly hearings.
  5. Fed staff should continue to brief and field questions from the congressional staff who prepare members for the hearings. The chair should meet with the leaders of the relevant committees in the week before the hearing.
  6. Congress should establish a process for obtaining and publishing the views of outside experts about key policy issues before each set of hearings.
  7. To make them more informative and allow for more give-and-take, each quarterly hearing in the House should allow only half the committee members to question the chair, and each member should be allotted 10 minutes (instead of the current five).
  8. The Fed should hire outside experts to periodically evaluate the procedures used to generate the economic projections that the Federal Open Market Committee receives from its staff and how the committee presents its own projections to the public. These projections — both the staff inputs and the committee outputs — play a critical role in policy making and should be as sound and well-understood as possible. Other central banks have successfully employed such external peer review, which would help Congress and the public better evaluate the quality of monetary policy.