Rep Paul: Fed audit in rules reform "pseudo"

Morning commuters drive past the Federal Reserve Bank building in Washington March 18, 2009.

WASHINGTON (Reuters) - A long-standing U.S. congressional critic of the Federal Reserve said on Friday his proposal to audit the U.S. central bank's monetary policy, an initiative strenuously opposed by the Fed, has been defanged in financial reform legislation in the House of Representatives.

"The plan now is to get an audit put into the bill, but it will be a pseudo audit, it won't amount to much," said Representative Ron Paul in an interview on CNBC television.

A bill sponsored by Paul, whose advocacy of abolishing the Fed predates the financial crisis, would allow the Government Accountability Office, a federal watchdog agency, to audit Fed interest-rate decisions has won the co-sponsorship of more than half the House.

The chairman of the House Financial Services Committee, Barney Frank, has said he will include elements of Paul's bill in broader financial regulatory overhaul legislation. Frank said he supports greater scrutiny of the Fed but would stop short of interfering with the Fed's ability to conduct monetary policy independently.

Support for Paul's bill reflects resentment against the Fed's decisions to bail out failing firms such as insurer American International Group during the crisis.

The Fed has sought to block audits of monetary policy, saying subjecting those decisions to political pressure would undermine market perceptions of Fed independence. Erosion of the Fed independence would likely lead to higher long-term interest rates as investors fear future inflation, Fed Vice Chairman Donald Kohn told Congress in July.

(Reporting by Mark Felsenthal; Editing by Chizu Nomiyama)