By Michael S. Derby

NEW YORK The Federal Reserve’s in-house watchdog defended his agency's independence and ability to conduct investigations in a Senate hearing on Wednesday, while acknowledging some dissatisfaction with the way his agency has looked into financial market trades by top central bankers.

“No Board Chair has resisted or objected to our oversight work since I have been the IG,” said Mark Bialek, who leads the Office of the Inspector General that provides oversight of the central bank and the Consumer Financial Protection Bureau. “If that were to happen, I would not hesitate to report that to Congress.”

Bialek testified before the Senate Committee on Banking, Housing and Urban Affairs as his agency has ended up in the crosshairs of some legislators. Over the last year and a half, the Fed has faced a series of controversies around trading activities of top officials, as well as its regulation of banks in the wake of some high-profile failures.

Those situations have prompted IG investigations. Some senators have been critical of the oversight and they are not confident that a Fed IG that is selected by and serves at the pleasure of Fed leadership can appropriately provide the oversight and accountability.

The Fed IG has faced particular heat over its investigation into the central bankers' trading activities. The watchdog cleared last July Fed Chairman Jerome Powell and former second-in-command Richard Clarida over their market activities, in a report that some observers, as well as legislators, felt whitewashed clear problems.

In addition, the Fed’s IG has yet to complete a hotly anticipated investigation into regional Fed leader trading even after news of that situation broke in September 2021.

The leaders of the Dallas and Boston Fed banks resigned in the wake of that reporting, and Atlanta’s leader last October acknowledged inadvertently breaking the rules that then governed how officials could trade for their personal accounts.

“I understand there is criticism about the independence and thoroughness of our ethics investigation of senior board officials, even the limited information that we disclose, but I want to emphasize that we independently and thoroughly investigated this matter,” Bialek told senators.

He said the fact that the report absolving Powell and Clarida was short on information was “intentional” due to the still-ongoing inquiry into regional Fed trading. “I absolutely agree that the allegations of improper trading and ethics violations are disturbing and they are alarming,” the Fed IG said.

Leading the Senate panel, Democrat Elizabeth Warren blasted the incompleteness of the investigation and tied many of the IG’s problems to structural issues.

"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, adding, "at best, you are in an impossible compromised position when it comes to investigating wrongdoing at the Fed.”

Warren is leading a bipartisan bill to make the Fed’s IG a presidentially appointed position, as is the case with many other government watchdog agencies but not all. Bialek has countered that such a reform is not needed and that his office has all the powers of a Senate-confirmed IG. He has also argued that making his position explicitly part of the government would lead to a pay cut that could create problems attracting leaders.

Bialek said his job paid around $378,000 a year, which is more than the just over $200,000 earned by Powell.

Warren responded to Bialek: “You realize that makes you the highest-paid employee at the Fed and in fact one of the highest- paid officials in the entire federal government. And I understand why you wouldn't want to give that up.”

(Reporting by Michael S. Derby in New York; Editing by Matthew Lewis)