A Watchdog Without Teeth: The Fed’s Transparency Crisis
Why the Federal Reserve Needs an Independent Inspector General
In a recent post on X, Treasury Secretary Scott Bessent called for a thorough internal review of the Federal Reserve’s non-monetary policy operations. This call comes amid a heated debate, plagued by rumors, over whether President Trump should fire current Fed Chair Jerome Powell. President Trump and members of his cabinet have advocated for Chair Powell’s firing over interest rate decisions, and now over an extraordinarily expensive renovation project. The Federal Reserve’s building renovation, with a $3.1 billion price tag, has outpaced several of the largest construction projects in the world (measured by square footage).
But an internal review doesn’t go far enough. There’s no clear insight into the structure of such a review or how it would be conducted. The real remedy would be the establishment of an independent inspector general (IG) at the Federal Reserve. Although the Fed currently has an inspector general, that position is not independent; the inspector is ultimately answerable to the very person under its purview. That’s hardly independent.
The Federal Reserve is in desperate need of greater transparency, And an independent inspector general would be a strong start. This is especially true in light of the Fed’s costly renovation project. A recent policy brief from Economist Andy T. Levin argues in favor of such a reform. An independent IG would follow the precedent set by other federal financial regulators and ease concerns about the blatant conflict of interest in the current arrangement. An independent IG would also sound the alarm when agency spending, whether on a massive building project or other less-visible expenditures, spirals out of control.
Calls for accountability and transparency at an agency are few and far between, but not unprecedented. Dr. Thomas Hoenig, a distinguished senior fellow at the Mercatus Center, offered one such call in an interview on the Working Definition podcast. Drawing on his experience as president and CEO of the Kansas City Federal reserve, Hoenig noted that transparency is inseparable from honesty and integrity.
He emphasized that regulators “have to be transparent…and have the mechanism in place to keep [them] accountable.”. Hoenig characterized transparency as a “consistent approach in our analysis,” being “open in [our] announcements”, and “delivering “on what we said we would do.” He emphasized the importance of agency leadership in modeling transparency. A core benefit of transparency, he argued, is that it builds trust with the public.
One mechanism to ensure transparency in government is through the establishment of an independent inspector general. The FDIC already has one. The Federal Reserve does not. It’s high time that changed.