U.S. Senators Warn of Potential Bias in Federal Reserve’s Inspector General Role, Propose New Legislation for Greater Oversight

U.S. Senators from both sides of the political spectrum have expressed caution regarding the potential financial incentives that the Federal Reserve’s Inspector General might have to conduct inadequate investigations into other Fed officials, as reported by Reuters on Tuesday.

According to a letter obtained by Reuters, Senator Elizabeth Warren from Massachusetts, a Democrat, and Senator Rick Scott from Florida, a Republican, have jointly requested specific information about the salary of Mark Bialek, the Fed’s internal Inspector General. This request comes as part of a bipartisan initiative aimed at enhancing oversight of the banking sector. Concerns have been raised that the role of the Fed IG may lack the required independence from the organization to ensure impartial decision-making, as highlighted in the Reuters report on Tuesday.

One of the key concerns lies in the fact that Bialek directly reports to the Fed’s board, in contrast to other agencies, like the Pentagon, where the Inspector General reports directly to the government. The senators’ letter points out that Bialek’s salary structure is directly linked to the compensation of the Fed officials he is tasked with investigating, which potentially gives rise to conflicts of interest.

In response to these concerns, Senators Warren and Scott have put forward new legislation suggesting that the appointment of the Fed Inspector General should be made by the President and confirmed by the Senate, aiming to ensure greater independence in the role.

“Because the Fed Inspector General’s salary is in part based on the bonuses earned by other Fed employees… there is a structural, financial incentive for the IG to overlook or downplay wrongdoing by those Fed officials,” the senators wrote in the letter. “These types of conflicts are why we have introduced legislation.”

Warren and Scott posed five questions to Bialek in the letter, including what salary he had received in the past five years, what percentage of his salary structure was based on bonus compensation and whether any investigations he conducted were connected to bonuses he received, according to Reuters.

At a Senate hearing earlier in May, Warren reprimanded Bialek about an incomplete investigation which he was responsible for and accused him of being “compromised” within the Fed, Reuters reported.

“The people who hired you and who have the power to fire you — that dynamic tends to create watchdogs that don’t bark,” Warren said. “At best, you are in an impossible compromised position when it comes to investigating wrongdoing at the Fed.”

Bialek defended the Fed during his hearing, assuring the Senate his investigations were truthful and independent from bias.

“No Board Chair has resisted or objected to our oversight work since I have been the IG,” he said at the time.

The Federal Reserve did not immediately respond to a request for comment.

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