BARTIROMO: Let me turn your attention to the Federal Reserve firing back at people like Rand Paul. Senator Paul wants this legislation out there, audit the Fed legislation, and he would like Congress to have more oversight over the central bank, which a lot of people feel is going to get more traction with a GOP-led Congress. What do you think?

PLOSSER: Well, I think this is a risky strategy for monetary policy. The Fed is already audited; we publish our balance sheet every week. This is not about financial auditing; this is about policy audits, if you will. And I think it would be very dangerous for the Fed to become ever more politicized by Congress and the government second-guessing policies that they there made.

The Congress has wisely given the Fed the tools it needs to implement monetary policy and respond to future crises as well as crucial independence to do its work free from short-term political influence. I would urge caution regarding current proposals that threaten just such political influence and place restrictions on the very tools that so recently proved essential in preventing a new depression. Congressional oversight of the Federal Reserve, including its conduct of monetary policy, is extensive, but no doubt could be improved in ways that do not threaten the Fed's effectiveness.

"I'll be blunt: we are audited out the wazoo," Dallas Fed President Richard Fisher said on Fox Business Network. "This (bill) is about interfering with the making of monetary policy. I respect the gentleman from Kentucky but he is wrong," Fisher said of Senator Rand Paul, who backs the bill.

Senator, I would welcome the appointment of a community banker to our board That said, I don't support requiring it via legislation. There are seven governorships. The board has many different needs. I think if we were to sit down and make a list of all of the kinds of expertise that are needed and are useful, there would be more than seven items on that list. And I would, you know, prefer to see appointments made in light of the priorities, including for a community banker, rather than for the indefinite future locking in and earmarking particular seats for particular purposes.

I feel that's a road that could go further in a direction that would worry me. If we're earmarking we could end up earmarking each seat for a particular kind of expertise. And I think greater flexibility needs due change over time. But that's not in any way to diminish my support for seeing a community banker appointed to the board.

Let me point out that the instructions from Congress call for the FOMC to stress the long run growth of money and credit commensurate with the economy's long run potential. There are many other things that Congress could have specified, but it chose not to do so. The act doesn't talk about managing short-term credit allocation across sectors; it doesn't mention inflating housing prices or other asset prices. It also doesn't mention reducing short-term fluctuations in employment.

Many discussions about the Feds mandate seem to forget the emphasis on the long run. The public, and perhaps even some within the Fed, have come to accept as an axiom that monetary policy can and should attempt to manage fluctuations in employment. Rather than simply set a monetary environment commensurate with the long run potential to increase production, these individuals seek policies that attempt to manage fluctuations in employment over the short run.

Let me just say a preliminary thing, which is I don’t think that the central bank should be equally independent in all of its functions. There are good reasons to have independence in monetary policymaking subject to a mandate or subject to objectives set by the democratic parliament or legislature. And we understand those reasons having to do with avoiding short-run political intervention in monetary policy and the like, but in many of its other activities — you know, for example, as a bank regulator, while we believe that bank regulators should be independent to make their own judgments about the quality of banks, I don’t think the Fed can presume to be any more or less independent in that function than is the OCC or some other bank regulator.

It’s just another aspect of our activities.

In our provision of payment services, there probably is no real case for independence, and it’s entirely appropriate for the Congress to ask questions about, you know, what we’re charging for those services and how we’re providing them and so on.

So I think it depends very much on the — on the aspect of the particular activity that the central bank is involved in.

So independence is a subtle concept. I think the — what it means varies according to the particular activity or particular function.

Q: There is an undercurrent of anti-Fed sentiment among the freshman Republicans. Support for the gold standard, anti-fiat currency… How do you respond to it?

A: I say I understand. I say gold is a very legitimate monetary system. However it will not end crises. It will not end credit bubbles. And it can be just as disruptive as a fiat currency – as an example the Great Depression when gold was hoarded and we had a very serious deflationary experience. Yes, the Fed contributed to it, but also governments contributed to it with their hoarding issues.

Q: But end the Fed?

A: I don’t see that a modern economy would function better without a central bank. We might have stable prices, but that is on average. In the meantime, we would have very strong deflationary pressures and very high inflationary pressures. The average is zero. That is the problem with that. It is not going to solve the world’s problems.

BERNANKE:  The basic idea of monetary policy is to provide broadly supportive financial conditions and to allow investment decisions in life to be made by the free market.

GARRETT(?):   Yes, right. Because when you go out and you purchase a trillion dollars worth of widgets, you're involving yourselves with the free market, because you're hyping the price of those widgets for everybody else.

BERNANKE: We didn't buy any widgets.

From the Q&A session

Chairman Dodd, Senator Shelby, Distinguished Members of the Committee, and to all the able staff who are sitting in seats I remember so well:

As a former banking counsel to your Committee, I cannot quite express what an honor it is to appear before you today. I never dreamed I would one day be here as a nominee to the Federal Reserve Board. (Or maybe I did dream it at some point, but I certainly never believed it.)

If you choose to confirm me, I will bring all of the experience, knowledge and commitment I have gained over the course of my career to the task of fulfilling Congress's statutory expectations, and I will maintain the standards of professionalism, independence, and probity that I've always tried to uphold in my career and that, to my mind, are exemplified by the work of {the Senate Banking} committee.

I don't think that's the right way to go. I think we want to maintain accountability through the Board of Governors which then oversees the system and that is really the appropriate way for us to be accountable to the Congress, which we will be. We want to be completely open and transparent to the Congress on all financial matters but we do need to maintain our independence on our policy decisions.

In response to a question about the proposal to make the FRBNY president a political appointee.

Congress, through the Government Accountability Office, can and does audit all parts of operations, except for monetary policy and related areas explicitly exempted by a 1978 provision passed by the Congress. The Congress created that exemption to protect monetary policy from short-term political pressures and thereby to support our ability to effectively pursue our mandated objectives of maximum employment and price stability.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

The latitude for the Federal Reserve to pursue its statutory objectives is expressed in several important ways. For example, the Congress determined that Federal Reserve policymakers cannot be removed from their positions merely because others in the government disagree with their views on policy issues. In addition, to guard against indirect pressures, the Federal Reserve determines its budget and staff, subject to congressional oversight. Thus, the system has three essential components: broad objectives set by the Congress, independence to pursue those legislated objectives as efficiently and effectively as possible, and accountability to the Congress through a range of vehicles.

...

The Congress, however, has purposefully--and for good reason--excluded from the scope of potential GAO audits monetary policy deliberations and operations, including open market and discount window operations, and transactions with or for foreign central banks, foreign governments, and public international financing organizations. By excluding these areas, the Congress has carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining the independence of the central bank’s monetary policy functions and avoiding disruption to the nation’s foreign and international relationships.

You could...have the central bank issue its own debt, which sounds radical from the U.S. perspective but is actually done by some foreign central banks. That would require an act of Congress to get that authority, and it is not too clear that Congress would be willing to allow the central bank to issue debt outside of the debt ceiling, which is established by the Congress.

We've got very large fiscal deficits. We've got the appearance...that the Fed is monetizing the deficit, pushing up yields. Anything that is going to erode the independence of the Fed is going to feed that expectation and drive yields higher.

...

So I think we are really in a delicate situation here as regards the independence of the Fed, and that is an important consideration going forward.

...

The Congress has thought over the last 100 years about how much independence to give the central bank. And when they really think about it, at the end of the day, they want the level of independence that we have. And so I think that will be the end outcome of this.  I don't think anyone involved intends to monetize the debt, but that is what it looks like to outsiders.

As reported by Reuters.