Safeguarding Fed Independence: The Case for an Independent Inspector General

Preserving the Fed’s autonomy requires not just a sound monetary framework, but also robust internal governance and meaningful congressional oversight.

In my previous post, I discussed two key pillars for preserving the Federal Reserve’s independence. First, I highlighted the case made by Kathryn Judge that the Fed’s legitimacy depends on the institution’s ability to consistently perform a distinct and valuable role within the broader policy ecosystem. The Fed’s standing is anchored in its core responsibilities — conducting monetary policy and serving as a lender of last resort — while avoiding unnecessary expansion into areas better handled by other parts of government. If the Fed were seen as overreaching its mandate by taking on quasi-fiscal roles or becoming a routine backstop for credit markets, then its independence would become vulnerable. Protecting the institutional boundaries that justify the Fed’s special role is therefore essential to securing its future.

Second, I emphasized that the Fed’s independence could be further enhanced by adopting a broadly defined, rules-based approach to monetary policy. If the Fed were to keep its target interest rate within a benchmark range based on various monetary policy rules, it could anchor its decisions during times of uncertainty and provide cover from political interference. I called this framework a “safe harbor” for the Fed: a system that would establish clear guardrails while still allowing the Fed the flexibility it needs to respond to economic conditions. A well-designed safe harbor would strengthen the Fed’s credibility by making its actions look more technocratic and less partisan.

Building on that foundation, this post turns to a third, equally vital pillar for sustaining the Fed’s independence: the need for strong internal governance and credible external accountability. Independence cannot rest on institutional boundaries and policy frameworks alone. The Fed must also meet the governance standards expected of other major public institutions. Yet today, it falls short on both fronts — operating without a truly independent Inspector General, remaining largely exempt from GAO performance audits, and exercising broad budgetary autonomy with little congressional oversight.

This missing oversight and accountability is the topic I explored this week on the Macro Musings podcast with Andy Levin. Our conversation was based on his recent policy brief titled Is the Fed Overstaffed or Overworked? Insights from the Fed’s Financial Statements. It is a provocative, but timely essay that highlights why the Fed sorely needs an independent IG and better Congressional oversight.

In this essay, I want to highlight some of Andy’s findings from this policy brief, as well as insights from an earlier brief he wrote for Mercatus. Before we dive into these essays, however, I want to share a short video clip from our conversation. Here, Andy compares the Fed on governance and accountability issues to other major central banks:

The Fed’s Growing Footprint, Shrinking Accountability

As Andy explained in the clip above, compared to other major central banks like the European Central Bank (ECB) and the Bank of England (BoE), the Federal Reserve operates with far less external review and independent scrutiny. The ECB welcomes comprehensive audits by the European Court of Auditors and the BoE has established an independent evaluation office and undergone outside reviews of its monetary policy practices, while the Fed continues to resist such oversight. Its audits are narrowly confined to verifying financial statements, with no external assessment of whether its programs and operations are effective or serve the public interest.

This lack of external review is particularly concerning because, as Andy Levin documents in his policy brief, the Fed’s footprint — in terms of staffing, compensation, and physical facilities — has expanded dramatically over the past decade, even as external oversight has remained minimal. Our conversation centered on these findings and the broader implications for the Fed’s governance and legitimacy.

Since 2010, staffing at the Fed Board and the regional banks has grown by about 20%, even as staffing at other large federal agencies declined by nearly 10%. Meanwhile, salaries at the Fed Board have risen by nearly 70% after adjusting for inflation, putting them far ahead of other federal employee pay scales. The Fed Board’s own employees now earn considerably more on average than senior officials at the Treasury Department.

The expansion is not just limited to personnel. The Fed is currently engaged in a $2.5 billion "revitalization" of its Washington headquarters, complete with rooftop gardens, underground parking, and new glass atriums — a scale of spending that dwarfs comparable government building projects nearby, such as the full renovation of the Ronald Reagan Building.

Now, perhaps there are good reasons for some of these developments. But the public has no way of knowing, because the Federal Reserve remains shielded from the types of independent oversight that apply to other large government agencies. Its Inspector General is an internal employee appointed by and reporting to the Fed Chair, not a Senate-confirmed independent watchdog. The GAO, Congress’s main auditing arm, is still prohibited from conducting full performance reviews of Fed operations. And Congress itself plays virtually no role in scrutinizing the Fed’s operating budget or large capital expenditures.

In short, the Fed enjoys extraordinary autonomy — but it operates with minimal external accountability. As Andy emphasized during our conversation, independence without oversight is a fragile thing. It risks breeding not only operational inefficiencies but, more dangerously, public and political skepticism.

This broader problem of weak oversight is the focus of an earlier policy brief by Andy Levin that, coauthored with Christina Parajon Skinner, titled Strengthening the Federal Reserve’s Accountability to the U.S. Congress. They argue that what we’re witnessing is not simply a lack of accountability, but a form of institutional undersight — where Congress has delegated enormous authority to the Fed without preserving the tools needed to monitor it.

An Independent IG: Essential to the Fed’s Future

The solution isn’t complicated. The Federal Reserve needs an Inspector General with the same standing as those at the SEC, the FDIC, and other major agencies — appointed by the President, confirmed by the Senate, and independent from the institution it audits.

An independent IG would enable real investigations when necessary, conduct serious reviews of the Fed’s large-scale spending, staffing, and operational decisions, and reassure both Congress and the public that the Fed is being held to the highest standards of governance without threatening its ability to conduct monetary policy independently.

An independent IG would not weaken the Fed — it would strengthen the institution by reinforcing its credibility and public legitimacy. With stronger accountability, the Fed could better defend itself against inevitable political storms and demonstrate a clear, confident commitment to transparency. Welcoming meaningful oversight would show that the Fed is operating in the public’s best interest. Transparency is not the enemy of independence. Opacity is.

While an independent IG would be a critical first step in strengthening both internal governance and external accountability, it would not be sufficient on its own. True accountability ultimately depends on a Congress willing to take its oversight responsibilities seriously — reviewing IG findings, holding the Fed to public standards, and acting when necessary to reinforce the boundaries and legitimacy that sustain central bank independence. In this sense, an empowered Congress and an independent IG are complementary, not substitutes. Both are essential to protecting the Fed’s independence over the long term.

The Path Forward

In an era of growing skepticism toward institutions of all kinds, the Federal Reserve must act now to bolster the political foundations of its independence.
Providing a policy safe harbor, as I discussed in my last post, is part of the solution. Respecting institutional boundaries, as Kathryn Judge reminds us, is part of the solution. But creating real accountability through a fully independent Inspector General is essential.

The Fed should not fear this. It should embrace it. Not as a concession to critics, but as an investment in its own future.

Because at the end of the day, an independent, accountable, and transparent central bank is not just good for the Fed. It’s good for the country.