New Politics of the Federal Reserve Desmond King

In the view of many critics of central banks, the adoption of quantitative easing policies from 2010 pushed these institutions and their policies into intensely political roles. The adoption of unconventional monetary policy meant experimenting outside the standard toolkit. Quantitative easing proved a powerful stimulus, but benefited wealthy investors disproportionately, and the growing levels of income and wealth inequality in advanced democracies were exacerbated.

This has created a legitimacy problem for central banks like the US Federal Reserve: while their policies have benefitted all citizens by helping growth and making borrowing cheap, most citizens have not felt these gains. Populism has been facilitated. Some argue that this legitimacy problem calls for a radical restructuring in how central banks communicate, and suggest devolving some economic policy to local communities to empower citizens – so they feel they can influence the macro policies which affect their lives.

In this context, four challenges face the Federal Reserve as its Chairman and Federal Open Market Committee (FOMC) Governors direct US monetary policy:

1. Presidential push

President Trump has relentlessly criticised Chairman Jay Powell and his colleagues for not lowering interest rates (and indeed for pursuing the opposite strategy by raising rates) in 2018. The Fed has subsequently stopped raising rates and may lower them. But such criticism challenges the Fed’s cherished political independence. If they appear to yield to Trump’s preferences they will be seen to be politically compromised. If they don’t, the critical barrage will persist. The exchanges go to the issue of central bank legitimacy, a problem not just in the US but in other advanced economies: the rise of populist sentiments about the ‘will of the people’ is a new experience for central bankers.

2. Crisis of personnel

Trump’s nominees for two vacancies on the Fed’s Board of Governors have faltered. The economist Stephen Moore proved a controversial nominee because of his lack of relevant professional experience (he also has an outstanding federal tax bill with the IRS), and his nomination was halted when past sexist comments came to light. The same happened to Trump’s second nominee, Herman Cain, who despite experience in business and monetary policy carried negative reputational baggage which led to his withdrawal. President Trump has now nominated economist Judy Shelton, US representative on the board of the European Bank of Reconstruction and Development. Having been vetted previously by Congress her prospects are good (as Inspires goes to print). However, she has been a long standing critic of the Fed’s powers and absence of democratic accountability.

3. Maintaining legitimacy

The world of central banking has changed globally since 2008 as citizens have learned both about the importance of these institutions in responding to financial crises and their regulatory weaknesses in the run up to the crisis. Their statutory independence does not make them immune to popular and political scrutiny, which has grown. Sir Paul Tucker, former Deputy Governor of the Bank of England, published a critique of central banks arguing they lacked sufficient transparency in decision-making to legitimate their choices with voters and citizens. They enjoy “unelected power”. These kinds of perceptions threaten not just the power but also the legitimacy of central banks.

4. Monetary policy tools

Lowering the interest rate stimulates the economy, but if interest (and inflation) rates are already and consistently at low rates, the Fed’s monetary policy tools are limited when a crisis hits. The FOMC has initiated a review of strategy, tools and communication practices. The review includes a series of town hall style “Fed Listens” events around the country, and a conference canvassing academic and non-academic views about monetary policy tools and responsiveness to citizen views. This populist public events strategy seems intended to counter enduring criticisms that the Fed’s response to the 2008 Great Recession favoured banks over consumers, but it’s highly unusual. All central banks value secrecy, remoteness, and the delivery of future policy intentions through gnomic hints rather than garrulous engagement.

The Fed Listens - at a crossroads

Populism deals in simplicity. Federal Reserve policy making is inherently complex, and the Fed is at a crossroads. Chairman Jay Powell and his two predecessors Janet Yellen and Ben Bernanke have expanded the communications practices of the Fed in two senses. Firstly, the FOMC’s Summary of Economic Projections, issued quarterly, includes “forward guidance” on where the FOMC sees interest rates going in the short to medium term, in addition to three-year rate projections. Secondly, Fed officials have given more public lectures than in the pre-Bernanke, Greenspan era and press conferences follow FOMC meetings, offering explanations for the policy decisions taken.

These measures are now being broadened as the Fed wants to buttress its political independence and maintain its legitimacy embedded within a democratic and electoral politics based system. Hence the use of “Fed Listens” events and other efforts to acquire information about perceptions of the central bank in this time of change.


Desmond King is Andrew Mellon Professor of American Government and Professorial Fellow, Nuffield College


Photo credits: Shutterstock; Flickr/whitehouse; Flickr/federalreserve; Flickr/kjgarbutt https://www.flickr.com/photos/kjgarbutt/6407270781

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