Andy Levin on Holding the Fed Accountable

Andy Levin is a professor of economics at Dartmouth College and longtime advisor to many central banks. Andy returns to the show to discuss his policy brief on holding the Fed accountable for its spending practices. 

Subscribe to David's new Substack: Macroeconomic Policy Nexus

Check out our new AI chatbot: the Macro Musebot!

Read the full episode transcript:

This episode was recorded on April 9th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you decided to join us.

Our guest today is Andy Levin. Andy is a professor of economics at Dartmouth College, a longtime Fed veteran, and an adviser to many central banks. Andy has a hot new Mercatus policy brief out, titled, “Is the Federal Reserve Overstaffed or Overworked? Insights from the Fed’s Financial Statements.” He joins us today to talk about it. Andy, welcome to the program.

Andy Levin: Thanks a lot, David. It’s really great to be here.

Andy’s Professional Background

Beckworth: It’s great to have you back on. You’ve been on the show previously. This new policy brief is really something else, and I’m excited to share it with our listeners today. Now, remind us before we get into it: You spent 20 years at the Federal Reserve. I was looking at your resume. You have also advised multiple other central banks, correct?

Levin: Yes, that’s true. Actually, it’s been great over the years. I’m getting old, lots of gray hair, but I’ve been an adviser at the central banks of Sweden and Norway, and I’m currently on an advisory panel at the Bank of England. I’ve been a regular visiting scholar at the IMF, and I’ve done technical assistance for various others. You can see it on my short bio, so I won’t go through it all. I think it’s important when we’re thinking about the Federal Reserve, what works well, and what can be improved, to look at other central banks, too.

Beckworth: Yes, so you bring to the table best practices from other central banks, not just the Federal Reserve. It’s important to keep that in mind as we get into this conversation. This policy brief, again, is titled, “Is the Federal Reserve Overstaffed or Overworked? Insights from the Fed’s Financial Statements.” It’s a pretty striking policy brief, Andy. I want to ask you, what prompted you to write it now? What’s at stake in this policy brief?

Overstaffed or Overworked?

Levin: This started, actually, in December. The incoming head of the DOGE, the Department of Government Efficiency, which is a new institution, didn’t exist before, and the incoming head tweeted in December and said, “the Fed is absurdly overstaffed.” It got quite a lot of attention, but there wasn’t much background to it. There wasn’t a report attached or some numbers, so it wasn’t clear where it was coming from. At the end of January, at the press conference, a reporter asked Federal Reserve Chair Jay Powell, “What about this? What do you think? Would you agree that the Fed is absurdly overstaffed?”

Chair Powell’s answer was essentially, “no, we’re not overstaffed; we’re overworked. If anything, we wish we had a lot more staff.” He said, “We’re very careful about our budgets and our budget process. We understand these are public funds, and so it’s our obligation to the public to be very careful about it.” He didn’t provide any reports or numbers either. Since I was at the Fed for 20 years, and I’ve been working on some of these issues for a long time, including the last Mercatus brief, and the last time it was on your podcast was with Christina Skinner, we had done a lot of work on the history of the Fed, the governance of the Fed, and the accountability of the Fed to Congress.

I thought, “I can take a quick look at this and see.” It seemed like the evidence is clear one way or the other, either the Fed is absurdly overstaffed, or it’s overworked, or maybe it’s somewhere in between. It seemed like a significant enough and important enough question that deserved going through the publicly available evidence. I’m not at the Fed anymore, I don’t have access to any confidential information or internal information, but just what’s the Fed reported, its financial statements, its budget documents, and other public sources of information. That’s how this got started.

The Fed’s Extraordinary Independence

Beckworth: Yes. Now, the stakes are high here because we don’t have an independent IG at the Fed who would normally look at these type of questions, right?

Levin: Right. One of the things that we emphasized in the previous brief is that the Fed has just extraordinary independence compared to any other U.S. government institution and really compared to practically any other central bank around the world. For example, the European Central Bank, which is a huge institution, has a comprehensive audit by the Supreme Audit Authority of the European Union.

They’re not just looking at the books of the ECB; they’re looking at everything: the programs, operations, and all the rest to review them. And the ECB welcomes that. The Bank of England has an independent evaluation office that’s like an inspector general’s office. They also have a court of directors that are scrutinizing everything. And the House of Lords actually has an independent committee. In fact, Christina has testified to them sometimes. Don Kohn has testified to them. They’re looking at everything.

A couple years ago, the government of Britain said, “We would like Ben Bernanke to come in and do an external review of the Bank of England’s monetary policy strategy, the forecasting, and the communications.” The Bank of England’s governor and their other officials said, “We would welcome that. We have tremendous respect for Ben Bernanke. He’s not only a former Fed chair, but he’s also a Nobel Prize laureate.” He came in with a small team of people to look at those things. They wrote a public report. The Bank of England’s written an initial response, but the Bank of England’s actually in an ongoing process of responding to that and trying to strengthen things that he identified as shortcomings.

Now, by contrast, the Federal Reserve has no external reviews whatsoever, none. They do have a financial firm come in and do an annual audit of their books, but even that audit is very narrow. There’s no questions about what’s beneficial to taxpayers, what programs are efficient or effective. In fact, the accounting standards, the Fed sets its own accounting standards. This is actually the previous Mercatus brief with Bill Nelson. The Fed has invented something called a deferred asset. It’s the only institution on the planet that has this.

The private organization that comes in to audit the books, in their audit letter, they say, “We’re just taking as given the accounting standards the Federal Reserve has established for itself.” They don’t raise any questions about the deferred asset because it’s just taken as given. Now, the difference here, again, from other central banks is the Federal Reserve being able to invent its own accounting standards, set its own budgets, buy its own buildings, do its operations and programs with practically no oversight and no external scrutiny.

Beckworth: Other central banks like the ECB, Bank of England, Bank of Japan, they wouldn’t have all these privileges. They would be held to an accounting standard, have external reviews, like you mentioned the Bernanke one. The Fed truly is an anomaly in the universe of central banks.

Levin: Yes, just to give you one important example here: The Fed, for almost all of its history, they had a monopoly on printing currency, legal tender that was profitable. When Congress gave that responsibility to the Fed, everyone understood that it would make money every year. A little bit like the manager of a forest; there’s an income from the lumber and wood that’s produced by the forest. That covers the expense of the forest operator, but then the rest of it goes to the town that actually owns the forest. The same concept for the Fed. Okay, now what’s changed in the last several years is the Fed did balance sheet operations and programs that actually are now costing taxpayers more than a trillion dollars.

The Fed’s not earning profits anymore; the Fed’s actually losing money. It’s running operating losses. That’s where this deferred asset comes in. The Fed has never done any cost-benefit analysis to explain to Congress or the public, “Here’s the programs we did, here’s why we did them, here’s why we ended up losing money, and here’s our lessons learned about what we might do differently the next time.” The Fed’s doing a framework review right now, and there’s nothing in there about the balance sheet or the programs or the losses to taxpayers.

Now, contrast that to the Bank of England. Before the Bank of England did asset purchases, there were discussions with the chancellor and the UK government to say, “There are some risks here.” The government said, “Okay, we understand that, but we want you to go ahead.” They underwrote it to say, “If this ends up losing money, then the treasury department of the UK will absorb those losses, so it won’t stay on the books of the central bank.”

If the Federal Reserve had gone to Congress, and you can pick whatever year you want, but before these programs were launched and said, “Is this okay?” And Congress had said, “Yes, we want you to do it. If it does turn out that they’re operating losses, we will bail you out.” It would have been an important discussion to have ahead of time. Here we are three years after the end of those programs, they haven’t even had an ex-post lessons learned discussion with Congress or with the public about this.

Beckworth: Yes, that is what’s really interesting or even puzzling to me, is that it gets so little attention. You had this policy brief. You’ve been on the podcast before. I think other than that and maybe a few reporters, people don’t talk about this, even though there are big losses. Another story that you just shared with me is that the IG at the Federal Reserve resigned recently, and yet it’s not in the news. We have these big developments. They don’t get a lot of attention, but they’re highly consequential.

Inspector Generals and the Fed

Levin: Okay, well, let’s talk about that for a moment. Every major US government institution, every cabinet, Pentagon, the State Department, the Treasury Department, they all have a fully independent inspector general, is appointed by the president of the United States and confirmed by the Senate. They’re considered to be a very important federal official. They’re nonpartisan. Their job in the law, the Inspector General Act, is to look at everything that that agency does and to determine the efficacy and effectiveness of programs. By the way, they do audit the financial books as one part of their work.

They would be responsible if there was fraud or if there was an employee who was absconding with materials of the agency. The IG does some of those, what you might think of as law enforcement. The bigger picture of what Congress reasoned, the Congress established one for every one of the major agencies, including Securities Exchange Commission and FDIC, all of the major agencies have one, is to help be a watchdog for the Congress so that Congress can understand better where the issues and what should they have a hearing about and where do they need to change the laws or the regulations.

When this was established, and now we’re going back almost 50 years, the Federal Reserve said, “Oh, we don’t need that. We’re a pretty simple, small shop. We have a very simple balance sheet. We have a pretty small staff. Okay, just let us have an inspector general who’s a Fed employee who will just report to the Fed chair and work at the direction of the Fed chair.” In 1978, Congress said, “Okay, that’s fine. Maybe we actually save a little bit of money to the taxpayers that can have a lower salary than the other full-fledged IGs. It’ll be one less appointment that has to be made by the president and go through the confirmation process.” They liked the idea of preserving the Federal Reserve’s independence.

That was 1978 when the IG Act was passed. Here we are, 45 years later, the Federal Reserve has just lost $1.5 trillion of taxpayer money. I think as we’ll talk about in a few minutes, the Fed’s spending $2.5 billion on upgrades of its buildings. I’m thinking, “Wow, this really seems like it would make sense now to have a fully independent inspector general at the Fed who’s looking at everything and who’s a watchdog and who’s alerting Congress and who’s helpful to the Fed.” I think it strengthens the Fed itself. 

External reviews are welcome by many organizations: a really good corporation, a hospital, a nonprofit organization. They would like to have a management consultant, an expert, or a team of experts come in and take a look. The CEO or the executive director of the organization says, “Hey, we would love to have you take a look at what we’re doing and tell us where can we improve.” If it’s a hospital, they recognize they’re serving the public. They’re providing crucial services. If there’s ways that they can improve, the head of the hospital, the board of the hospital, everyone wants to find, “Is there something that we’re missing here?” Having someone come in from outside can be really helpful to that. The Federal Reserve, in contrast, has been extremely resistant.

Two years ago, Senator Elizabeth Warren, who everyone knows is a progressive Democrat, and Senator Rick Scott, who everyone knows is a conservative Republican, the two of them proposed legislation. It was a nonpartisan bill to establish a fully independent inspector general at the Federal Reserve. Guess what? The Fed says, “No, we don’t need that. We don’t want that. It’s not going to be helpful to us.”

The bill died. I hope now Congress will revisit this this year. As you mentioned, the Fed’s IG has just resigned. Retired may be a fair word. This will be a very opportune time for the very next IG at the Fed to be a fully independent federal official appointed by the president, confirmed by the Senate, with the credibility and legitimacy to scrutinize everything the Fed’s doing.

Beckworth: The point you’re making is that having an independent IG actually strengthens the Fed’s independence because if you can have an authority that looks over your shoulder, you can say, “Look, we’re doing this. It’s all above board. No secrets here.” It really strengthens their case for independence.

Levin: I’m sorry. That needs to be clarified. Independence is not unconditional. The Federal Reserve is not a fourth branch of government. The Federal Reserve is actually an agency created by the Congress. The reason that’s important—this was the work that Christina and I did. It’s a law review article now, by the way, in the Vanderbilt Law Review. It was carefully vetted. The US Constitution is very clear that Congress has the duty to regulate the value of money. For more than 100 years, Congress carried that out.

In 1913 and then more so in the 1930s, Congress said, “We’re delegating the responsibility to the Federal Reserve to regulate the value of money on behalf of Congress and ultimately on behalf of the public.” Just to be clear here, the Federal Reserve is not an independent country. When we talk about independence, what we really mean, economists mean, it’s jargon, is we would like them to be insulated from political interference so that they’re carrying out the mission of monetary policy in a way that’s really beneficial to the public and not to any special interest and not to any particular politician. That’s what we mean.

Now, when we say that a fully independent inspector general would be helpful, I think what I mean by that is that it would strengthen the Federal Reserve’s accountability and its public legitimacy. Because if people understand that the Fed can’t just do whatever it wants—it can’t build palaces, it can’t build Versailles Palace on the mall, which I think is a fair characterization of what they’ve been doing the last several years; it’s basically building a palace on the mall at taxpayer expense—that was never what economists meant by saying, “Oh, it’s important for central banks to be insulated from political pressure.” We weren’t saying, “Oh, central banks should be able to have their own palaces.”

Beckworth: Fair enough. Yes, good points. We want to talk about that palace you just mentioned, as well as the staffing issue. Just one last observation about the losses on the Fed’s balance sheet that you brought up. It is striking to me, though, that in a number of other countries, they have talked about this. Our friend Bill Nelson was previously on the show. We were talking about how many other advanced central banks are actually moving their operating system toward more of a demand-driven ceiling system, in part because they’ve had these conversations. They recognize the losses of big floor systems. They’ve had conversations.

There’s other reasons as well. One of them is they’ve thought about big balance sheets. They’ve thought about a floor system. They’re making this transition. Where in the United States, there’s almost radio silence about the losses, about this particular operating system, other than people inside this world, the monetary policy space. I think it’s good to have this conversation. You keep writing these policy briefs. 

Levin: Almost everyone I talk to talks about David Beckworth’s podcast.

Beckworth: Oh, thank you.

Levin: You should be proud of it. Why is it the case? Not just your podcast, but there’s other podcasts and blogs and social media, that’s become a really important part of public discourse and public communication. I think part of the reason for that in the case of the Federal Reserve is because the legacy media reporters who cover the Federal Reserve are in a very difficult position. That if they want to be invited to the press conferences, and they want to be able to come and have lunch with the Fed chair, there’s an expectation that they’re going to be very deferential in their reporting. You see it. You just watch a video of the press conference.

Many reporters are, “Oh, Mr. Chairman, thank you so much for being with us today. It’s such a privilege to have you come down from the top of the mountain.” The questions are, typically, very respectful and very gentle. A lot of the reporting is like that. I think that it’s very different from other agencies, very different from what you would typically see at a White House press conference or even a US Treasury press conference, you name it, the State Department press conferences, where reporters are trying to break news. They’re trying to ask questions that are challenging questions, not the softball ones.

Of course, there are a few of those. The Fed is really different. I think that has created a vacuum. Like you said, here we are a week after the inspector general resigned on April 1, the Federal Reserve never issued a press release about it, which is just mind-boggling. Because, in the past, if a Federal Reserve official departed, there was always a press release to say, “We appreciate John Jones’s service. He has been here for 15 years, and we’re really grateful for that.” Then they would say, “Jennifer Jackson is serving as the acting chief or the acting director, and here’s the process for appointing the successor.”

You will look at it for division directors and other departments at the Federal Reserve. There’s something really unusual here that the inspector general of the Federal Reserve stepped down on April 1 and more than a week has gone by, and you can see on their website, there’s an acting IG. But there was never a press release and there was never any reporting in the media about it. Many people, maybe on your podcast, will be the first time they’re like, “Oh, I didn’t know that the IG had changed.”

Beckworth: Yes. Who doesn’t want to have lunch with the chair at the Palace of Versailles on the mall, as you called it? We’ll talk about that in a little bit. You have some pictures here of the incredible gardens and rooftop that’s going to be a part of this new transformation. Before we get to the building, let’s get into the issue of the number of workers and payroll, because that really was the question that motivated this policy brief. Is the Fed overstaffed or overworked? What say you, Andy Levin?

The Fed’s Workers and Payroll

Levin: Just to be clear on this question, it would be a much better question for members of Congress to be able to ask a team of experts who work for an independent IG or a team of experts who work for the Government Accountability Office, the GAO, which is another watchdog Congress created. GAO does comprehensive reviews of every other US government institution, except the Fed. When the GAO got that responsibility, Fed asked for an exemption, Congress gave it. The same time as the IGs were created, the Fed got the exemption from the GAO. They’re all: “We don’t need that either.” Congress said, “Okay, fine.” The truth is that GAO should have a team of people who are looking at everything.

The Fed’s a big, complex institution. The GAO should be looking at all aspects of it. The GAO does look, by the way, at the banking supervision. They wrote a devastating report about the Federal Reserve’s failures in supervision of Silicon Valley Bank and Signature Bank. Those are major bank failures that happened a couple of years ago. The Fed did its own internal report. It was called the Barr report. Even other Fed officials, Miki Bowman, who’s now been nominated to be the vice chair for supervision, she said, “We never saw that report before it was made public and published on the board’s website.” Even though it says Federal Reserve Board report, it was really just a report of the vice chair at the time.

GAO came in because they do have legal authority to look at the banking supervision, and they identified the weaknesses and shortcomings. It’s great. My point here is that with these questions that were raised by DOGE, is the Federal Reserve absurdly overstaffed or is it overworked, what you would really like is a full, careful look by a team of people who are getting access to a lot of detailed information and making assessments and comparisons here to other government agencies, to other central banks.

I just want to be clear about this because my Mercatus brief is 10 pages long. It was just a few weeks of effort by a single person using readily available public information in the Fed’s annual reports to try to get a first stab of a ballpark, like does this look pretty much the same as usual, or is there anything odd here? I think what I would say that seems fair without having a whole team of people looking at things and asking questions and going in and making comparisons to other central banks and other agencies, it looks odd. Just to be concrete about this, the very first figure in the policy brief, the Federal Reserve Bank’s employment since 2010 has increased by 25%.

The Federal Reserve Board’s employment has increased by 17%, so call it on average, a little more than 20%. All the other large federal agencies, which includes Social Security Administration, it includes EPA, there’s a bunch of others, their employments actually shrunk over the last 15 years. Why? Because there’s been a lot of improvements in IT, a lot of improvements in payroll processing, a lot more things are done digitally, electronically, and there are cost savings to that that benefit the taxpayers. 

All those other federal agencies are reviewed by GAO, Government Accountability Office, the watchdog. All of them have their own independent inspector general who’s looking at everything and writing reports to Congress. All of those other agencies, their budgets go through the appropriations process, so they’re reviewed by Congress, including, for example, the SEC, Securities Exchange Commission. Now, Securities Exchange Commission is not funded by the taxpayers. The funding for SEC is from the fees that they charge to the companies and others who are registering documents and so on. There’s fees. Those fees are set under the oversight of Congress. When SEC says, “Well, we need to expand our staff,” that’s a question that goes through the congressional appropriations process.

The Federal Reserve is different. Federal Reserve, they say, “Well, we need more staff,” then hire them. Where does the money come from? Answer: “Push the button because the Federal Reserve can create digital money in an account and then pay its own staff with that money.” It’s taxpayer money, but the Federal Reserve can make these decisions without any oversight, without any review. There’s no one coming in, taking a look. 

I think there may be good reasons why the Federal Reserve Board has had an employment growth of nearly 20%. It’s not obvious when you look at the graph because the Federal Reserve did get some new responsibilities under Dodd-Frank for doing more careful regulation of some of the largest financial institutions in the United States. It’s a very important responsibility. This is now what Miki Bowman is taking over. That’s her responsibility as the vice chair for supervision. What’s interesting in the picture is that the Dodd-Frank Act was passed in 2010. From 2010 to 2014, there’s very little change in the number of employees at the Federal Reserve Board. It doesn’t look like they hired a bunch of new people in order to meet these new responsibilities.

What you notice in the picture is the employment started to really go up around 2018, 2019, 2020, and it’s been going up very fast over the last five years. Same with the buildings we’ll get to in a minute. The building expenses, which is in a capital budget, so it’s separate from the operating budget, those building expenses during the 1980s, 1990s, and the 2000s generally matched depreciation. In other words, you’re doing ongoing maintenance to make sure that the buildings are still safe and secure and that the water still works, and you have to update the wiring sometimes, but more or less in line with depreciation.

Suddenly, in 2018 and 2019, and now over these last five years, the Federal Reserve’s capital budgets have skyrocketed to multibillion-dollar upgrade projects that they haven’t discussed with Congress. They didn’t go to Congress and say, “We know we’re not in the regular appropriations, but we wanted to alert you that we’ve decided to do this.” And because there’s no independent IG, and there’s no reviews by the GAO, the Federal Reserve could just quietly build a palace and hope that no one notices.

Beckworth: Before we get to the palace on the mall, one last question about the employment side. You also looked at compensation. How does compensation at the Federal Reserve compare to other comparable federal agencies?

Levin: Okay, great question. Again, just to be clear here, I should have said this already before. I have a lot of friends and colleagues who work on the staff of the Federal Reserve, some in DC, some at other regional Feds. They’re highly talented, smart people. They are hardworking. They’re very public spirited. I didn’t want anyone to misunderstand that this is a critique of Fed staff. The real issues here are about how the Fed operates and its lack of external review, lack of oversight, and the need to strengthen those. It’s not fundamentally about the staff.

It is important, when we’re thinking about the Federal Reserve as a public institution that was created by Congress, that for 75 years of the Federal Reserve, the Fed Board in DC was setting all the salaries to be more or less similar. Not identical, but more or less similar, moving in parallel with the rest of the government. For example, each of the Federal Reserve banks, there are 12 of them—Boston, Richmond, Atlanta, Chicago, San Francisco, and so on,12 of them—they each have a president who’s the CEO of that regional Fed. It’s an important position. Those people actually are at the table in DC when there’s a monetary policy meeting. We call it the FOMC.

They’re sitting at the table, and some of them are actually voting on those decisions. It’s a really important role. They’re also overseeing the supervision and banking supervision and other activities, cash management, check clearing, and there’s various other things the regional Feds have done over the years. The president of the regional Federal Reserve Bank is an important Fed official. From 1913 until the 1970s, the Federal Reserve Bank presidents, their salary was very similar to the salary of the Treasury secretary, the US Treasury secretary, which is one of the top cabinet officials.

No one ever complained about it, I think, when members of Congress looked at it, because it’s in the annual reports of the Federal Reserve, what the salaries of the top Federal Reserve Bank officials were. There was no questions about it. It’s like, “Okay, we could quibble, they should be 5% below the Treasury Secretary, but the Fed has this independence to be able to set the salaries of its own officials,” and they did it in a reasonable way. 

Something changed around the 1980s, into the ’90s, and more recently. Little by little, the Federal Reserve Bank presidents’ salaries were increasing 5% a year, 10% a year in some cases. What you have now is the Federal Reserve Bank presidents are paid more than the president of the United States. They’re paid more than the chief justice of the Supreme Court. They’re paid more than any federal judge in the United States. A federal judge—and they’re important positions, too, by the way. We can see that all the time. The federal judges are paid about, in 2024, call it $240,000, and the Federal Reserve Bank presidents are paid about $450,000. Basically, double the salary of a federal judge. The Treasury secretary of the United States today is paid about $245,000. The Federal Reserve Bank presidents are paid $450,000. 

Again, we’re having a GAO review this. Having a fully independent inspector general review this. Think carefully. “What is the right salary?” On the one hand, you want really talented, public-spirited Federal Reserve Bank presidents as CEOs of these 12 regional Fed banks. They are public officials, and they’re doing it as a public service, not for financial motives. Federal judges, I’m sure you know this, they could leave. They could leave office and go to the corporate sector and probably make two, three, four times as much money. The federal judges’ pay is not competitive with the private sector in that sense. We never see federal judges leave office, almost never. They understand it’s a really important duty. It’s an honor.

I think what ideally would happen, and it may take some time, is for the Federal Reserve to move back to a culture of, “This is a really important public service. We appreciate you doing it. If at some point you need to leave to go to the private sector, that’s your decision. We’re not going to try to compete with a CEO of an S&P 500 corporation where they’re making multiple millions of dollars.” It seems like where the Fed is heading, if they continue in this direction for another five, 10, 20 years, is Federal Reserve Bank presidents paid $5 million a year. Why not? I think the answer to that is because they are public officials.

Beckworth: You would say, just at a minimum, having an independent IG or the GAO look at this issue to shine light on it, to say, “Hey, why are you making the decisions you’re making?” Even if they can come up with a legitimate opportunity cost story, whatever it may be, let’s at least have the conversation. We’re not having that now.

Levin: Right. Now, again, remember here that under the Constitution, monetary policy is the responsibility, the duty of Congress. The Federal Reserve is a creation of Congress. It’s an agency created by Congress to carry out that duty. The real issue here is that Congress created inspector generals, and it established the Government Accountability Office, the GAO, as watchdogs to report to Congress so that Congress can understand. Some of these issues are very complex. It’s not just the Fed. You’re talking about NASA and what satellites or what mission to Mars and how far ahead should we plan that.

The GAO has done reviews of the use of artificial intelligence and facial recognition by the FBI and other security agencies. They’re looking at a lot of very complex issues. They have teams of experts. The GAO itself has reviewed, by the way. They have reviews every several years by auditors from other countries that come and look at the GAO and assess it. Those are published in the GAO documents, the extent to which the recommendations are adopted by agencies and how much the cost savings are to taxpayers.

What I wish is that Federal Reserve officials would welcome these external reviews. That they would just say, “Hey, we would love GAO to come in and take a look. Everything is up. We have nothing to hide. Nothing to hide. Look at everything we do and tell us what we could do better. If maybe we need to make some adjustments to the salaries, then probably not overnight, but we could be on a three- or five-year plan to move toward salaries that make sense and that are consistent with other parts of government institutions.”

One of the things that Congress has recognized now for several decades is that there are experts working in certain government agencies who need to be compensated at a higher level than typical civil service. The typical civil service, it’s called the GS scale. There are tax accountants in the Treasury Department. There are attorneys in the State Department, and Department of Homeland Security has experts who are paid above GS pay scale. It’s perfectly reasonable that the Federal Reserve would have some experts like that, attorneys, economists, banking supervision, who are paid above a normal GS scale.

I think what I noticed when I was going through the data, the Federal Reserve has published the salaries of its top 500 staff members. You can compare those to the salaries of people at the Treasury Department. My figure three is actually a direct comparison of those two categories, the officials on the staff of the Federal Reserve Board in DC and the officials on the staff of the Treasury Department just down the street in Washington, DC.

What you notice here is really remarkable because, for example, the chief financial officer of the Federal Reserve, as of 2024, was being paid close to $350,000. The chief financial officer at Treasury was being paid about half, $220,000. Little more than half, but call it half. Now, what’s weird about this, and strange and odd about it, is the Federal Reserve Board has 3,000 employees. The Treasury Department has 110,000 employees. It’s 30 times bigger. More than 30 times larger. Why is the chief operating officer and the chief financial officer of the Federal Reserve Board getting paid double the Treasury? Now, I don’t know the right answer to that question. Some people will say, well, maybe the Treasury officials should get a big pay increase, but this is something that Congress should be paying attention to. As a matter of equity and fairness and morale, the people who are doing very similar things in the Federal Reserve should be paid similarly to those people in IT, in human resources.

Again, there could be a few experts that are off of that scale, but the ones that are directly comparable, it should be consistent. Every single Federal Reserve official on the staff of the Federal Reserve Board, every single one, is paid more than the Treasury secretary. That’s something that GAO and an independent IG should be looking at.

Updates to the Fed’s Headquarters

Beckworth: Let’s move to the upgrade of the Federal Reserve’s headquarters. You’ve already mentioned $2.5 billion. Walk us through all the bells and whistles. I think you’ve alluded to the glass atriums, rooftop gardens, even a lot of square footage per employee. Walk us through why this is so surprising, and maybe even troubling to you.

Levin: Okay. Just to give you a little bit of history, the Federal Reserve Board took on a really important role in the 1930s. At that time they had 200 staff. By 1951, when the Federal Reserve started to take on really important monetary policy, the Federal Reserve Board staff had grown to about 500. Over the next 10-15 years after that, they expanded to 1,000, and then to 2,000. Now they’re up to 3,000. At various points, the Federal Reserve Board would start leasing office space because they can’t fit all those employees into their main building.

The first building they have, it’s called the Eccles Building, named after Marriner Eccles, who was the Fed chair in the 1930s when that building was created. After he retired, they named it after him in his honor. They start leasing office space. In the 1960s, the attorneys of the Federal Reserve said, “If you build a tunnel under the street, you could build another structure across the street. There’s an empty lot. It used to be a parking lot. We can build another structure there and it’ll still be part of the same building legally. We don’t need to go to Congress to ask their permission to change the Federal Reserve Act.”

The Federal Reserve got the property and they put up the building. After that Fed chair retired, it was named after him. His name was William McChesney Martin Jr., so it’s called the Martin Building. It’s a beautiful building, the Martin Building. Fast forward, in the year 2000, the Fed bought a third building down the street on New York Avenue. It’s a pretty plain vanilla office building, nothing fancy there. 

In 2018, they said, “We need a fourth building.” It turned out there was a building that belonged to the Department of Interior next door to the Fed. The Fed went to the Government Services Administration that runs the federal government’s buildings. The Fed went to the GSA and they said, “Hey, could we buy that building from you?” It’s fascinating to read the press release from the GSO, because the GSA says, “We’re pleased to transfer this building to the Federal Reserve Board. This is a historic property, 3.2 acres, facing the National Mall, listed in the National Register of Historic Places. This transfer will put a vacant building back into productive use, allow the Fed to consolidate several leases, and result in savings for taxpayers.” That was the most amazing phrase: savings for taxpayers.

The Federal Reserve gave GSA $41 million. The expectation of GSA was that the Fed would need to do some work in rewiring the building and maybe updating the restrooms, $10, $20, $30, $50 million dollars maybe to do some renovation and updating, but it was a beautiful building. You can see photographs of what it looked like in 2018 when it was transferred to the Fed. I think GSA honestly thought that this was going to be savings to taxpayers. But the Federal Reserve said, “Oh, now that we own it, we could actually spend real money and make this even better.”

There’s architectural plans that are all public because the Federal Reserve, in order to do this because it’s right on the National Mall, the Fed had to go to what’s called the National Capital Planning Commission. It’s part of the DC oversight to make sure that buildings on the National Mall are consistent with the spirit of the Washington Monument, the Lincoln Memorial. The Federal Reserve is right across the street from the Vietnam War Memorial. The National Capital Planning Commission, their responsibility is not to look at budgets. Not at all. They’re architects, and they’re looking at how is this going to affect the sightline.

One of the Fed’s proposals is, “Well, we could build a seven-story building.” The Capital Planning Commission was like, “No, that would really change the sightline. We don’t want you to do that.” The Fed says, “What if we just put up a dining room on the top of the roof? It would only change the sightline by a little bit from the street.” National Capital Planning Commission says, “Okay, that’s fine. We’ll let you do that.” The irony of this, however, and this is where you start to read the engineering reports, is these are historic buildings. They weren’t designed to have an extra load up on the top of the roof.

When the Fed officials are saying, “We’d really like to have some dining facilities up there. There will be a spectacular view of the Washington Monument,” the engineers are saying, “The building wasn’t really designed to bear that load. This is going to be pretty expensive. We’re going to have to add steel reinforcements and beams and so on because it’s a historic building.” “No problem, just go ahead.”

Then they’re like, “We’d like to have some rooftop garden terraces so that after the luncheon or the dinner, the Fed officials can go take a little stroll in the garden up there on the top of the roof.” Then the engineers said, “Soil for a garden is heavy. That’s going to be a lot of weight. You’re going to have to add a lot more reinforcement, and the buildings weren’t designed for this.” Fed officials say, “Okay, no problem. Go ahead and do it.” 

Then they’re like, “It’d be really nice if we have these as glass atriums. We’re going to enclose the courtyards, and then Fed officials and staff can go and sit in those courtyards and have peace and quiet.” You read the architects and they’re like, “This will be really nice and tranquil, but it’s expensive, because adding those glass atriums, again, there’s weight bearing.” Now, another thing the Fed said is, “Since we’re doing all this work, we’re not going to just do it for the new building. We’re going to do it for our existing building, the Eccles Building that was built in 1933. We want dining facilities on that roof too, and we want glass atriums over there too.” 

Then they said, “We really need some more underground parking.” They talked to the engineers, and then engineers—again, this is all public, because the engineers are like, “Well, this is not simple.” The Federal Reserve is just a very short distance, a few hundred meters from the tidal basin. This used to be a swamp. The engineers say, “There’s groundwater eight to 10 feet under the surface of the ground, and at 40 feet there’s bedrock.” They said, “If this was out in the countryside, we could just use dynamite or heavy-duty drills and get rid of the bedrock, no problem. But you have historic buildings here.” Again, the answer to that obviously was, “Don’t worry about it. You do whatever you need to do.” Then you end up with a $2.5 billion bill at the end of it.

It’s not actually surprising because this was building Versailles Palace, with just spectacular water features, rooftop garden terraces, glass atriums, and private dining rooms on the tops of roofs. The only problem is—

Beckworth: Sounds amazing.

Levin: —it’s taxpayer money, but the taxpayers will never get to see it. This is not a museum that’s going to be open to the public, where people can go up to the rooftop garden and walk around. This is going to be for the exclusive use of a small number of Federal Reserve officials and their VIP guests, and that’s why I think taxpayers should actually be very unhappy about this.

Beckworth: You mentioned in your policy brief a comparison to the Department of Homeland Security that had renovations as well, and they’re just a few blocks away. How much did it cost them?

Levin: Great question. Again, GSA is the part of the federal government that runs all their buildings. Just to be clear, the Securities and Exchange Commission, which is another very important independent agency, they don’t own any buildings in DC. They lease office space from GSA. All the offices they need, they lease from GSA. If the Securities and Exchange Commission says, “We need some new wiring here,” or, “We need some new security at our entrance,” then there’s a discussion with GSA. GSA, like a landlord, they do the work and they figure out, make sure it’s cost-effective, and that’s all with oversight from an IG and from the GAO, and it goes through a congressional appropriations process. That’s how SEC does it.

The Federal Reserve Board could do it that way. The Federal Reserve Board gets to own its own buildings, and if it wants to have glass atriums and rooftop garden terraces, it can just do it, poof. It’s the same button we were talking about before that you were talking about with Bill Nelson. They just press the button, create some electronic money, and then they pay the contractor or the architect.

You asked me about the Reagan Building. I’ll just mention briefly here that the GSA operates the offices the Department of Homeland Security uses in the Reagan Building for about the same number of staff, about 2,500 staff of the Department of Homeland Security, in the Ronald Reagan Building. Now, you know this. The Reagan Building is only about six or eight blocks from the Federal Reserve Board Building. It’s a beautiful building. The GSA is doing a comprehensive renovation for Department of Homeland Security—I think it’s specifically the Customs and Border Office within Homeland Security—for 2,500 employees, and the whole cost of that renovation is a little over $100 million. 

The Federal Reserve Board is spending more than 10 times that amount. It’s not a renovation. It’s not an office expansion, by the way, because—and I looked through these details—they’re not creating new office space. Actually, the Federal Reserve, the term the Fed uses in all these documents for the National Capital Planning Commission, is revitalization. The accurate way here to describe this using the Fed’s own terminology is it’s a $2.5 billion building revitalization. Now, revitalization sounds really cool, and you’re like, “Oh, that’s glass terraces and garden terraces and fountains and private dining rooms up on the tops of roofs.” A pretty fancy revitalization.

Other Fed Challenges

Beckworth: You’ve mentioned a number of other areas at the Fed that you look at in the policy brief. You’re asking, do we get a good return on our investment as taxpayers? You looked at the Fed now, you looked at IT challenges at the Fed, you looked at their forecasting ability. There’s a number of things. We don’t have time to go through all of them, but maybe let’s just do one of them. Let’s pick, say, the IT question, because there’s an interesting story there that you found surprising and, again, speaks to the fact that maybe having an independent IG would have prevented some of the challenges that they now have.

Levin: Yes, great. Just briefly on the forecasting, the Federal Reserve staff, as late as November 2021, were still saying that inflation was transitory and that by 2022, inflation would be back to target. Of course, that wasn’t true. In fact, inflation went up close to double digits. 

The Bank of England faced similar issues. The Fed wasn’t unique in this. The difference is the Bank of England, in consultation with the UK government, said, “We’d really like to have an external review. We want to do some lessons learned here.” That’s when they invited Ben Bernanke to come in and do an external review. He specifically looked at the forecasting process. His recommendation was for them to do scenario analysis, which I’m also a big fan of, thinking about risks and alternative scenarios that would help understand those risks and think through what the policy response would be. 

The main point is the Federal Reserve has not done a lesson learned about the forecasting errors. There’s been no public discussion. They’re doing a framework review this year, but there’s nothing at all about the shortcomings and mistakes that were made several years ago. That’s number one.

Number two is that more than 10 years ago the Federal Reserve had a task force on payments, 300 different organizations were involved in it—community groups, banks, other financial institutions—and everyone agreed that the Federal Reserve should facilitate instant payments. Britain already has this. Canada, Australia, the European Central Bank, everyone else had it, and they’re like how come the United States doesn’t have instant payments? Finally, in 2018, 2019, the Fed said, “Okay, we’ll do this too,” and they called it FedNow.

The FedNow instant payment system was launched in August of 2023, so almost two years ago now. As of December of 2024, so 15 months after the launch, there was 4,000 transactions a day going through the FedNow system. Not quite zero, but you have to imagine here, 4,000 transactions in an economy—and we know this from other payment systems; there’s one called ACH, Automated Clearing House, that processes millions of transactions per day—this is 0.01% is going through FedNow.

Now, you would think there would be an inquiry here. If this was in Britain, you can be sure, in Australia, you could be sure there would be an inquiry. What went wrong here? What are the lessons learned? What would we do differently? Do we still want a better payment system? We need to go back to square one and start over, or should we just forget the private sector has filled in the vacuum here on this? I don’t know, but all I can say is the Fed’s IG has written absolutely zero about FedNow. What went wrong with it?

Now there’s an opportunity for Congress to establish a fully independent IG. That person would be appointed by the president and confirmed by the Senate. One of the very first things that IG could do is to look at FedNow, what went wrong, and what are the lessons learned.

Now third one you asked about, which is the information security. Unfortunately for the Fed, one of their senior advisers, a longtime senior official at the Federal Reserve, has been indicted recently for economic espionage. Never happened before, to my knowledge, in the history of the Federal Reserve. I’ll try to be as clear as I can because of the legal matter here and of course innocent until proven guilty, but the indictment says that this Federal Reserve adviser had access to highly sensitive internal Fed documents. Highly sensitive in the sense that they’re worth a lot of money if you knew what was in them.

This Fed adviser was emailing those sensitive documents to his personal email account, printing them out, and giving them to Chinese officials. That’s the indictment. I don’t know the details of this. I don’t know what documents, I don’t know what was in it, and I don’t know what conversations actually happened. That’s something that’ll have to go to court. What was disturbing to me is that other central banks and other commercial—like the Bank of America or Wells Fargo or JPMorgan Chase; I’m an adviser at the Bank of England—they all have a system where if you’re sending an email from the official account to an external account, it marks it. It says “External.”

The IT system would check and see what attachments are there and it would block. If it detects the attachment is a sensitive document, it would just block it from going out, and it would put a warning up on the screen saying, “sorry, you can’t send this document to an external email account.” It would probably send an alert to someone in the information technology department. They check up with the person, they say, “We noticed yesterday that you were trying to send a sensitive document to an external email account.” And the person would say, “Oh, really sorry. I just lost track and it was a mistake.” If it happened again of course there could be consequences.

What’s troubling here is that the Fed’s IT was obviously behind the curve because this kind of system had been implemented years before by many other companies, and many government agencies, and many other central banks. What makes it even worse is that Congress passed an act in 2014 that required every agency, the inspector general, to review the information security systems at the agency and to certify if it was effective or to identify any shortcomings. That was in 2014.

What should have happened in 2015, 2016, and 2017 is the Federal Reserve’s IG says, “This is unsatisfactory. There’s a real risk here that a Fed employee either intentionally or accidentally could send sensitive information to an external email account that has to be fixed right away.” Then ideally by the time that Fed IG report was published, the IT department says we’ve already fixed it, we appreciate the review by IG.” That’s the way things are supposed to work. As it is, in reality, the Fed’s IG was certifying the Fed’s IT information security as effective all through this period—2016, 2017, 2018, 2019, 2020—as the economic espionage was occurring, or at least alleged to have been occurring.

This just reinforces this view that having an inspector general who’s working at the direction of the Fed chair creates conflicts of interest. That don’t rock the boat, don’t ask too many questions. You’re paid a nice salary, enjoy your beautiful office, but don’t cause us any trouble. I’m assuming that that’s at least part of the problem here of why they were certifying a system that was clearly unsatisfactory was being certified as effective.

How to Improve the Fed

Beckworth: Okay. We are near the end of our time, so land the plane for us. What should be done so we can avoid some of these challenges moving forward?

Levin: Again, I think the simple summary is that the Federal Reserve officials, the Fed’s leadership, should welcome external reviews. They should give a very clear indication to the public and to Congress to say, “We serve the public, and Congress is our boss and we’re trying to do the best we can. We really want to serve the public as effectively as possible, and we would love to have people come in and do external reviews and tell us what we could do better.”

By the way, just like a management consultant, if someone comes in and does an external review, they give you some advice, you don’t have to take all of it. You respond to it and you say, “We understand your advice, but actually we decided to take a different approach.” There’s a congressional hearing, and let’s say the GAO official or the IG is at the hearing and they say, “This is what we recommend,” and the Fed says, “Well, we’re taking a different approach,” and the members of Congress say, “We actually like the Fed’s approach better,” that’s great.

In other cases the Fed’s like, “We thought about this carefully, we decided to do what the IG is recommending.” That’s great too. The main thing is make it all out in the open. Nothing to hide. You want this extraordinary independence, is the word you used, the extraordinary ability for the Fed to carry out this really important mission rests on its legitimacy, its accountability, and its transparency. It’s urgent, I think, for the Federal Reserve to ask for more external reviews because if it doesn’t, then it looks like they are trying to hide something, and that undermines their credibility.

Beckworth: Okay. With that our time is up. Our guest today has been Andy Levin. Andy, thank you so much for coming on the program.

Levin: Great, thank you.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.