One likely result of the GOP sweep of the midterm elections on November 4 is increased scrutiny of the Federal Reserve from the new Republican majority in both chambers of Congress. Richard Shelby (R-AL), who has at times been critical of the Fed, is set to become the new head of the Senate Banking Committee and could have significant influence over future Federal Reserve Board nominations.

The next Congress could also introduce a new version of the Federal Reserve Accountability and Transparency Act, which seeks to audit the Fed and legislate a monetary policy rule. While it is likely such legislation would either be filibustered by the remaining Democrats in the Senate or vetoed by President Obama, the possibility of such legislation being introduced and debated in both houses of Congress for the first time is a reflection of how many elected officials would like to see changes in the Federal Reserve System – which is historically well-known for its preferred independence from the federal government.

In response to the possibility of heightened Fed scrutiny, St. Louis Fed President James Bullard said in a Fox Business interview last week that the Fed has “worked well for a long period of time as an independent group that’s at arm’s length from the political system.” Indeed, core inflation – one of the two Fed mandates – has been consistently around 2% for years.

Bullard also pointed to the strength of the Federal Reserve System, comprised of 12 regional banks, which enable the Fed to “get voices from around the country on these important decisions that are being made.” He added, “I don’t think you want to make all of these decisions straight from Wall Street or straight from inside the Beltway.”

The Fed has arguably become even more distanced from Wall Street in recent years following the complicated (and arguably ineffective) Dodd-Frank reforms, some of which are still being written and revised.

Sitting on the other side of the argument are Senators like Rand Paul (R-KY), Bernie Sanders (I-VT) and even liberal Elizabeth Warren (D-MA), who have all previously endorsed the Federal Reserve Accountability and Transparency Act (“FRAT”). The bill calls for a full audit of the Fed for the first time ever – including its private discussions related to monetary policy – by the Government Accountability Office.

Interestingly, a number of Democrats have also shown support for a Fed audit. In September, House leaders called up FRAT and approved it in a 333-92 vote (all but one of the “no” votes came from Democrats). Support for an audit of the Fed has increased over the past two years. The Fed has steadfastly resisted such a move, citing its supposed “independence.”

Now that Republicans have clinched a majority in both chambers of Congress, similar legislation may be introduced in the Senate in their next session. However, it remains unclear whether Senate Democrats would filibuster such legislation and how President Obama would respond.

The Federal Reserve Accountability and Transparency Act seeks not only to audit the Fed, but also to legislate monetary policy rules that the Federal Reserve would be required to follow. Proponents argue that a more specific “rules-based” monetary policy is long overdue. Opponents argue that it would curtail Federal Reserve independence and its effectiveness in mitigating inflation and unemployment.

What the new Congress does with respect to the Fed will be interesting though likely not very material. It’s likely the Fed will maintain its arms-length distance and independence from the federal government, which has allowed the Fed to make the decisions it has, supposedly to reduce unemployment while keeping inflation stable around its 2% target.

Nonetheless, it will likely be the first time we see a Fed audit bill get debated in both chambers of Congress. Personally, I’m all for such a debate.  I have long believed that the Fed should be audited annually, especially now that its balance sheet is apprx. $4.5 trillion!

As for whether the Fed’s private communications regarding monetary policy should also be made public, I’m on the fence on that one. For now, I am satisfied with the Fed releasing the “minutes” from its FOMC policy meetings every six weeks or so – even though those minutes are released a few weeks after such meetings.

While nothing will happen until sometime after the new Congress is sworn in this January, I wanted clients and readers to know that the idea of auditing the Fed is back on the radar.

What do you think? Should the Fed be audited annually or treated as an independent body?