GAO decries spending by the Federal Reserve Study released day before Senate panel considers Greenspan nomination



WASHINGTON -- In a rare independent examination of the Federal Reserve Board's operations, a congressional report yesterday criticized management by the secretive central bank of its own finances, suggesting it could spend less and return billions of dollars to the Treasury.

The report by the General Accounting Office (GAO) was released by two Democratic senators. Today, the Senate Banking Committee is to consider the nomination of Federal Reserve Chairman Alan Greenspan to a third term.

While it contains no direct criticism of Mr. Greenspan, and does not address the monetary policy pursued by the Federal Reserve under his leadership, the report provides an unusually detailed look inside an institution with enormous power and, critics contend, insufficient accountability.

The report found that the central bank's spending rose from 1988 to 1994, the period it studied, at a rate much higher than overall federal government spending.

Operating expenses for the Federal Reserve Board and the 12 Federal Reserve Banks increased 50 percent, to $2 billion, twice the rate of inflation and nearly three times the rate of growth in overall federal discretionary spending.

The report said contracting and procurement practices at some Reserve Banks "favored certain sources over others, despite system-wide guidance that prohibits this, raising questions about conflicts of interest and favoritism and whether the system is receiving the most favorable prices."

And it said that the Fed -- which operates with no oversight of its internal finances -- has accumulated a $3.7 billion contingency fund out of money that would otherwise have been returned to the treasury.

"Although the surplus account is intended to absorb possible losses, the Federal Reserve has recorded substantial net profits for 79 consecutive years," the report said. Each year the Fed returns $16 billion to $24 billion in profits from its own operations.

The size of the Fed staff rose 4 percent from 1988 to 1994, to 25,745, but total compensation costs rose 53 percent in the same period, to more than $1.3 billion.

During the six-year period, benefit costs in the Federal Reserve rose 91 percent for each employee. The increase for federal government employees generally was 62 percent.

The report seems likely to raise eyebrows among many, from President Clinton, who has heard Mr. Greenspan lecture repeatedly on the need to make painful choices to reduce the federal budget deficit, to ordinary citizens, whose mortgage rates, credit-card bills and savings accounts are influenced by the central bank.

There has long been a tug of war between members of Congress who want greater oversight of the Federal Reserve, and the central bank, which jealously guards its independence as a bulwark against political meddling in the sensitive area of interest-rate policy.

One of the senators who released the report, Harry Reid of Nevada, said he had been told by the GAO, the investigative arm of Congress, that the study was the most comprehensive that it had conducted about the central bank.

Mr. Reid and Sen. Byron Dorgan of North Dakota, who asked the GAO to do the report, have sought unsuccessfully for years to pry more information from the central bank about its operations and to interest colleagues in legislation to create more oversight without impinging on its independence to set monetary policy.

Joseph Coyne, a Federal Reserve spokesman, said the central bank was given a copy of the report by the GAO for comment and would have no public statement until it had drafted its reply.

Pub Date: 3/26/96

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