Federal Reserve System

The mission, the structure, and especially the finances of the Federal Reserve System, the nation's central bank, make it unique among government entities. Unlike federal agencies funded through congressional appropriations, the Fed is self-funded, deducting its expenses from its revenue and transferring the remainder to the U.S. Treasury. Although the Fed's primary mission is to support a stable economy, not to maximize the amount transferred to the Treasury, deductions from Fed revenues do represent a cost to taxpayers. Because of continuing federal budget constraints, Members of Congress requested GAO to analyze the Fed's finances. This report (1) examines trends in the cost of Fed operations from 1988 to 1994 and its controls over spending and operations, (2) identifies ways to increase the Fed's efficiency without harming its effectiveness, (3) discusses developments that could significantly affect the Fed's mission and finances, and (4) assesses the Fed's strategic management processes and identifies steps that it could take to meet future challenges and ensure the efficiency and the effectiveness of its operations.

GAO found that: (1) Federal Reserve operating expenses increased from $1.36 billion in 1988 to $2 billion in 1994; (2) the most significant operating cost increases were for bank supervision and regulation, personnel pay and benefits, and extensive modernization and consolidation of information systems; (3) operating costs vary among reserve banks because the Federal Reserve has not established consistent policies; (4) the Federal Reserve could reduce its personnel benefits and travel-related reimbursements, and realign its contracting and procurement practices; (5) a reduction or elimination of the Federal Reserve surplus account, which increased from $2.1 billion in 1988 to $3.7 billion in 1994, would increase federal budgetary receipts in the year that the reduction or elimination occurs; (6) major developments such as increased competition from private-sector suppliers, use of electronic banking, and consolidation of the banking industry, are likely to affect the Federal Reserve's operations, future role, and management structures; and (7) the Federal Reserve must eliminate the weaknesses in its planning, budgeting, oversight, and audit processes that impede its cost control efforts.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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