By Mark Felsenthal
WASHINGTON (Reuters) - A U.S. congressional panel on Thursday approved a measure to open the Federal Reserve's monetary policy decisions to government audits, a surprise blow to the central bank's efforts to shield its independence and a signal of frustration with the central bank.
The provision, co-sponsored by Republican Representative Ron Paul and Democrat Alan Grayson, would allow a congressional watchdog agency to conduct a broad review of the U.S. central bank's policy and lending. Fed officials have strongly opposed it, saying it would cast doubt on the central bank's independence from political pressure.
The House of Representatives Financial Services Committee approved the amendment to broader legislation to revamp financial rules. The panel put off a vote on the broader measure.
House Financial Services Committee Chairman Barney Frank, who opposed the Paul-Grayson measure, predicted it would be revisited when financial reform legislation is debated by the House.
"I think it's going to be seen as weakening the independence of monetary policy with consequent negative implications," he told reporters after the vote. "I think people will be worried about the impact on the dollar and on interest rates, and I think that one may be revisited when we get to the floor."
However, Paul's measure has earned support from more than half of the members of the House.
The amendment is a further congressional slap at the U.S. central bank after a Senate regulatory overhaul proposed stripping the Fed of its regulatory authority. Some lawmakers fault the Fed for failing to anticipate or prevent the financial crisis that pitched the economy into deep recession, while others are angry at its extensive emergency support for financial institutions.
The Fed objected to the provision, saying it could raise financial market questions about its independence and could result in higher long-term interest rates as investors worry about inflation risks.
"History provides numerous examples of non-independent central banks being forced to finance large government budget deficits," Fed Vice Chairman Donald Kohn said in July. "Such episodes invariably lead to high inflation."
Paul is an outlier in U.S. politics who advocated abolishing the U.S. central bank well before the financial crisis. He ran for president as a Republican in 2008 and recently published a book called "End the Fed."
However, the Texas lawmaker was able to tap into widespread congressional frustration with the Fed.
"The Fed currently has no political capital," conceded Representative Mel Watt, a Democrat who opposed the Paul-Grayson provision. "Everybody would like to beat up on the Fed and call them the bad guy," Watt said. "(But) are we going to so substantially castrate the Fed so it cannot do what it was set up to do?"
Watt had promoted a compromise amendment that would have allowed audits of the Fed's balance sheet and lending but would have drawn a clear line at leaving monetary policy alone. Frank, the committee chairman, backed Watt's proposal.
A Fed representative declined to comment on the vote, and cited earlier comments from senior Fed officials expressing concern that monetary policy audits would undermine the central bank's independence.
(Reporting by Mark Felsenthal; Editing by Gary Crosse, Gary Hill)