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At the University of Wisconsin, LaCrosse, Wisconsin
October 24, 2000

The Politics of Monetary Policy: Balancing Independence and Accountability
It is widely believed, at least among central bankers, that "independence" is a prerequisite
for achieving the goals that traditionally have been assigned to central banks--specifically for
achieving price stability. "Independence" does not mean literally independence from
government, because central banks here and abroad are almost always part of government.
The relationship of central banks to the rest of government is, in practice, therefore much
more complex than the term "independence" might suggest.
The motivation for granting independence to central banks is to insulate the conduct of
monetary policy from political interference, especially interference motivated by the
pressures of elections to deliver short-term gains irrespective of longer-term costs. The intent
of this insulation is not to free the central bank to pursue whatever policy it prefers--indeed
every country specifies the goals of policy to some degree--but to provide a credible
commitment of the government, through its central bank, to achieve those goals, especially
price stability.
Even a limited degree of independence, taken literally, could be viewed as inconsistent with
democratic ideals and, in addition, might leave the central bank without appropriate
incentives to carry out its responsibilities. Therefore, independence has to be balanced with
accountability--accountability of the central bank to the public and, specifically, to their
elected representatives.
It is important to appreciate, however, that steps to encourage accountability also offer
opportunities for political pressure. The history of the Federal Reserve's relationship to the
rest of government is one marked by efforts by the rest of government both to foster central
bank independence and to exert political pressure on monetary policy.
The purpose of this paper is to clarify the relationship of central banks within government, to
explain the nature, degree of, and rationale for the independence afforded to many central
banks--with a special focus on the role of the Federal Reserve within the U.S.
government--and to discuss the balancing of independence and accountability in principle
and in practice.
The dictionary defines independence as being free from the influence, guidance, or control
of another or others. As applied to central banks, that translates into being free from the
influence, guidance, or control of the rest of government, meaning both the executive and
legislative branches in the United States.
It is useful to distinguish two types of independence for central banks: goal independence

and instrument independence. If a central bank is free to set the final objectives for
monetary policy, it has goal independence. If a central bank is free to choose the settings for
its instruments in order to pursue its ultimate objectives, it has instrument independence.
Most central banks have specific legislative mandates and therefore do not have goal
independence. Thus the "independence" of "independent" central banks is instrument
independence under which the central bank has authority to choose settings for its
instruments in order to pursue the objectives mandated by the legislature, without seeking
permission from, or being overturned by, either the executive or the legislature. However,
countries vary considerably in the specificity of the mandated goals and hence in the degree
of discretion of central banks in the conduct of monetary policy.
The Need for Independence
Central bank independence is designed to insulate the central bank from the short-term and
often myopic political pressures associated with the electoral cycle. Elected officials have
incentives to deliver benefits before the next election even if the associated costs might
make them undesirable from a longer-term perspective. This phenomenon has been called
the political business cycle in which pre-election stimulus leads to higher inflation followed
by monetary restraint after the election.
On the other hand, it appears that elected officials in many countries apparently understood
the incentives under which they operate and have structured charters for their central banks
that, in effect, tie their own hands--that is, limit political interference with monetary policy
to enhance the prospects of achieving and maintaining price stability. Nevertheless, the urge
to exert political pressure--to support the objectives of the Administration as well as those of
the Congress, to take the U.S. case, and other times to support the re-election of the
President or of congressional incumbents--sometimes becomes irresistible. At such times, the
tradition of independence at the Fed, the leadership of its Chairman, the influence of long
terms for governors, and the presence of Reserve Bank presidents on the Federal Open
Market Committee (FOMC) become especially important.
In addition, budget priorities and monetary policy objectives can be in conflict. The
executive branch generally wants to keep the cost of servicing its debt low, and this
preference might be at odds with the need for monetary policy to vary interest rates to
maintain price stability. This tension has been present during both World Wars and for
several years following World War II.
Finally, especially in countries where debt markets are not well developed, central banks
might be called upon to finance budget deficits by printing money, again interfering with
maintaining price stability. The Federal Reserve, for example, was asked to directly
underwrite government debt during World War I but a statutory prohibition on directly
purchasing government debt was later added to the Federal Reserve Act.
Some have worried that even an independent central bank could succumb to the temptation
to stimulate the economy today at the expense of higher inflation in the future. This is
referred to as the problem of time inconsistency. That is, the central bank has an incentive to
commit itself to price stability and then to renege on this promise in order to gain
employment in the short run with relatively little initial sacrifice in the form of higher
inflation. In the long run inflation would rise and the central bank would either have to
tolerate the higher rate of inflation or push output below potential for a while to restore price
stability. Once the public understood this process, moreover, it would expect higher inflation,

so that, in the longer run, the result could be higher inflation without any short-run gain in
Several solutions to the time inconsistency problem have been offered. First, the rest of
government could impose a rule on the central bank, restricting its ability to play the game
described above. The rule would ensure a credible commitment to price stability, thereby
anchoring the public's expectations and removing the inflationary bias that otherwise might
result. Second, the government could appoint conservative central bankers--central bankers
with a greater commitment to price stability than the public--and thereby offset the
inflationary bias that would otherwise arise. Third, central bankers could be forced to
operate under performance or incentive contracts, whereby they could be penalized for
failure to maintain price stability. The Governor of the Bank of New Zealand operates under
such a performance contract; he can be removed from office for failure to achieve his
inflation target.
I have never found the literature on time inconsistency particularly relevant to central banks.
Surely central banks realize they are facing a repeated game, not a one-time game. They will
therefore be reluctant to undermine their credibility over the longer run by pretending to
pursue price stability while stimulating the economy for short-run gain. Long terms and other
institutional ways of insulating central banks from short-term political pressures allow
central bankers to take this longer view and make them less likely to follow
time-inconsistent policies. Still, the problem highlighted in the time inconsistency literature
may reinforce the case for both a price stability legislative mandate and instrument
independence for the central bank.
Independence also is likely to reinforce the credibility of a central bank's commitment to
price stability. This enhanced credibility may then yield additional benefits. First, it could
allow the central bank to reduce the cost of lowering inflation. It is generally agreed that to
lower inflation monetary policy must reduce output for a while, relative to potential, by
reducing aggregate demand. The resulting loss of output during the transition to lower
inflation is a measure of the cost of reducing inflation. The more quickly inflation
expectations fall, the more rapidly will inflation itself decline, and the lower will be the cost
of reducing inflation.
A credible central bank could also be more effective in conducting stabilization policy. If
aggregate demand were to slow, a stimulative monetary policy move would be less likely to
undermine confidence in the central bank's pursuit of price stability when the central bank is
independent (and has a price stability mandate). In addition, if inflation moved upward,
inflation expectations would be less likely to follow immediately, making it easier for the
central bank to contain inflation.
Evidence on the Benefits of Independence
An extensive literature examines the relationship between the independence of the central
bank and economic performance. The empirical studies generally find an inverse relationship
between measures of central bank independence and both average inflation and variability
of inflation, at least for developed economies. These are only correlations, however, and
thus do not prove causation. The inverse relationship could also reflect the fact that
countries with less aversion to inflation might be less likely to have independent central
banks. In addition, there is no consistent evidence of a relationship between central bank
independence and real economic activity nor consistent evidence that central bank
independence lowers the cost of reducing inflation or increases the effectiveness of

stabilization policy. On balance, the evidence on the benefits of central bank independence
is strong enough to satisfy those who find the theoretical arguments persuasive, although its
is not strong enough to convince skeptics.
The History and Evolution of Central Bank Independence
A century ago there were only 18 central banks, 16 in Europe, plus Japan and Indonesia.
Today there are 172 central banks and over recent years the number of central banks that
claim some degree of independence within government has steadily increased. More central
banks have become independent in the 1990s than in any other decade since World War II.
Changes in Britain, Japan, and continental Europe made 1998 a banner year in the history of
central bank independence. The Bank of England, one of the oldest central banks in the
world, was founded by an act of Parliament in 1694. It was involved in commercial activity
until the end of the 19th century, but it had gradually shifted during those 200 years toward
exclusive focus on central bank activity. The Bank of England had substantial independence
for much of the 18th and 19th centuries, but by the 20th century it had essentially become
an agency of the British Treasury. Then, in June 1998, it was reborn as an independent
central bank under the current Labor government.
The Bank of Japan gained operational independence in April 1998. The Bank is still not
legally independent, a status prevented by the Japanese constitution. In addition,
representatives of both the Ministry of Finance and the Economic Planning Agency attend
meetings in a nonvoting capacity. But before then, the Ministry of Finance could require the
Bank to delay implementation of a change in policy; now it can only ask. Recently, the
Ministry of Finance indeed asked the policy committee of the Bank of Japan to delay a
decision to raise the Bank's target interest rate. In an exercise of the Bank's newly attained
power, the policy committee rejected the request.
The European Central Bank (ECB) began operating on June 1, 1998, and assumed
responsibility for monetary policy in the euro area on January 1, 1999. The ECB is the
world's first supranational central bank and probably qualifies as the most independent
central bank in the world. The charter for the European System of Central Banks (composed
of the ECB and the national central banks of the member countries) is an international treaty
that can be changed only by unanimous consent of its signatories. With its supranational
status, the ECB is further removed from the political pressure of national governments than
even the most independent national central banks. In addition, there is no political
counterpart to the supranational ECB. The European Parliament carries out oversight
hearings on monetary policy but does not have any authority with respect to the ECB.
Independence and the Federal Reserve System
The Federal Reserve, created in 1913, was established as an independent central bank-although, at the time, it was given no clear concept of its role in the conduct of monetary
policy. The only reference to policy goals in the original Federal Reserve Act was that the
Federal Reserve was responsible for providing an elastic currency--that is, one that would
expand as appropriate to accommodate the need for additional transactions as production
and spending grew.
The major question for the founders was the degree to which the U.S. central bank should be
a public or a private institution. Bankers wanted a largely private central bank. Populists
wanted a public institution. President Wilson and Congressman Glass steered a middle
course. There would be a Federal Reserve Board that was completely public and Federal

Reserve Banks that would have significant characteristics of private institutions. During the
first half century of Federal Reserve history, the Congress continued to focus more on issues
involving the structure of the Federal Reserve than on providing a clear legislative mandate
for monetary policy or oversight of the conduct of monetary policy.
A former Fed governor, Andrew Brimmer, in a 1989 paper entitled "Politics and Monetary
Policy: Presidential Efforts to Control the Federal Reserve," describes the record of almost
"continuous and at least public and vigorous conflicts" between Presidents and the Federal
Reserve. In his view, twelve of the fourteen Presidents between the founding of the Federal
Reserve and the time he was writing--from Woodrow Wilson to George Bush--had "some
kind of public debate, conflict, or criticism of Federal Reserve monetary policy," the
exceptions being Calvin Coolidge and Gerald Ford. He alleged that Presidents resented the
delegation of monetary policy by the Congress to an independent Federal Reserve and
sought ways to bring monetary policy under their influence, often by exerting direct political
pressure on the Federal Reserve, but principally through the appointment process. Examples
of the latter cited by Brimmer include Nixon, believing that the Federal Reserve had cost
him the election in 1960, replacing Chairman William McChesney Martin with Arthur Burns
in February 1970 when Martin's term expired; Carter, appointing William Miller to replace
Chairman Burns in 1978; and Reagan, appointing Alan Greenspan as Chairman in 1987. For
the most part, their best efforts to appoint sympathetic choices as Chairmen have, in
Brimmer's judgment, been frustrated by the systematic tendency of Chairmen and other
Board members to insist on exercising their congressional mandate.
Thomas M. Havrilesky, in a 1992 book, also provides an account of, and some attempts to
measure, the intensity of political pressure over time, based on the number of comments on
monetary policy made by Administration officials, including the President, and by members
of the Congress. He concludes that there was little pressure from the executive branch
during the Eisenhower and Ford Administrations, but many more such efforts in the
Kennedy, Johnson, and Nixon Administrations.
My experience on the Board is that the Clinton Administration has respected the
independence of the Federal Reserve to a degree that, given the accounts of others, may
exceed that of any previous Administration. To be sure, President Clinton has had
opportunities to make appointments to the Federal Reserve Board and he has twice
reappointed Alan Greenspan as Chairman. But to my knowledge the Administration has
never made any public or private effort to influence monetary policy.
The Federal Reserve has been technically independent of the President from the beginning,
even though the Secretary of the Treasury and the Comptroller of the Currency originally sat
on the Board. Although it is a creature of the Congress, the Federal Reserve Act delegated
control over the currency to the Board and Congress insulated the Federal Reserve from
elective politics to a large degree. The current structure of the Federal Open Market
Committee was introduced in the Banking Act of 1935, which became effective in March
1936. At that time the Secretary of the Treasury and the Comptroller of the Currency were
removed from the Board. 1 The terms of governors were extended from ten to fourteen
years and the Chairman and Vice Chairman were made appointees from within the Board
with four-year terms. This structural change is often viewed as allowing the culture of
independence to flourish at the Fed.
The legislation was also a battle between the Administration and the Congress. The
Administration wanted to shift the power over monetary policy toward the centralized and

presidentially appointed Federal Reserve Board governors, a group they had a better
opportunity to influence through the appointment process. The Congress partly resisted and
diluted the control of the Administration by allowing a role for the Reserve Bank presidents
on the FOMC.
During both World Wars, Treasury wanted to issue securities at low interest rates to ease the
burden of financing and the Fed went along because it felt bound to facilitate wartime
financing. In addition, during World War I, Reserve Banks bought most of the government's
first $50 million certificate issue directly from the Treasury despite strong objections from
some System officials. Such direct purchases were later eliminated and the statutory
prohibition on direct underwriting of government debt is today considered one of the
principal protections of the independence of a central bank. After World War I, the Treasury
opposed raising the discount rate to combat inflation, but the Fed did so anyway.
During World War II, the Fed sacrificed its independence by agreeing to peg the Treasury
yield curve to ensure low rates for wartime financing. After the war, the Fed wanted to
resume an independent monetary policy, fearing that it would otherwise become an engine
of inflation, but the Treasury was still concerned about minimizing the service cost of the
debt. To resolve this conflict, an agreement was negotiated in 1951 by Assistant Secretary of
the Treasury William McChesney Martin and Fed officials. The Congress, led by Senator
Paul Douglas, also played an important role through its support for Federal Reserve
independence. Under the terms of the Accord, as it came to be known, the Fed was no
longer obligated to peg the interest rates on Treasury debt, but it was agreed that active
consultation between the Fed and Treasury would continue. That active consultation
continues today.
From the end of World War II until the mid-1970s, the mandate for monetary policy was
based on the Employment Act of 1946. This legislation set out a general mandate for the
government. Although it did not explicitly refer to the Federal Reserve, it was widely
understood that the act applied to the central bank as a part of government. The act
identified the government's macroeconomic policy objectives as fostering "conditions under
which there will be useful employment opportunities…for those able, willing, and seeking to
work, and to promote maximum employment, production, and purchasing power."
Conflict between the executive branch and the Federal Reserve erupted dramatically in
December 1965. President Johnson did not want the Administration's stimulative fiscal
policy undermined by restrictive monetary policy. Chairman Martin supported an increase in
the discount rate as an appropriate step to contain the risk of higher inflation. A key vote
occurred on a proposed increase in the discount rate at a Board meeting on December 3.
Although the President tried to influence the Chairman's position, and others in the
Administration put pressure on other members of the Board, the Board of Governors voted
4-3 to support the Chairman. Following the vote, the President summoned the Chairman to
the President's ranch in Texas. But the vote stood. The independence of the Fed was
preserved and indeed used for precisely the purpose it was intended. Subsequently, virtually
everyone agreed it had been the correct decision. The system worked.
The Congress became more involved in the monetary policy process in the 1970s. This was a
response to both poor economic performance and changing views about the importance of
monetary aggregates in shaping economic developments, especially inflation. Inflation began
to rise in the late 1960s and escalated further in the 1970s. During this period, monetarism
was an increasing influence, with its focus on the importance of limiting the rate of growth

of the money supply to control inflation. But it was the sharp recession in 1974-75 that
really provoked the Congress to provide more detailed instructions to the Federal Reserve
about the objectives that should guide monetary policy.
In 1975, the House and Senate passed Concurrent Resolution 133 calling on the Fed to
lower long-term interest rates and expand the monetary and credit aggregates to promote
recovery. The Fed was also instructed to set money growth targets and to participate in
periodic congressional hearings on monetary policy. For the first time, the Congress
explicitly identified the objectives for monetary policy. The same language about the
objectives applies today. Still, with its focus on the conduct of monetary policy at a point in
time (rather than on general guidelines on policy objectives to be applied over time), the
resolution was a clear instance of action by the Congress to intervene and influence
monetary policy.
The monetary policy objectives written into the concurrent resolution were added by an
amendment to the Federal Reserve Act in 1977 and were further elaborated in the Full
Employment and Balanced Growth Act of 1978, often referred to as the Humphrey Hawkins
act after its co-sponsors.
Another clear attempt at political interference emerged in February 1988 when an
undersecretary of the Treasury sent a letter to Federal Reserve officials urging them to ease
monetary policy. The request was promptly and publicly rebuked by Chairman Greenspan.
Having an attempt at political pressure become public and be sharply rejected was an
unusual event in the history of the relationship between the executive branch and the
Federal Reserve.
The reporting requirements in the Humphrey-Hawkins act expired in May 2000. As a result,
the Congress is now reconsidering the monetary policy oversight process. In part because
the link between money growth and nominal spending appears to be less tight than it was
earlier, the role of money growth in monetary policy deliberations has diminished and it
appears likely that the Congress will no longer require the Fed to set and report money
growth ranges. However, the current language about the objectives of monetary policy
seems likely to be retained, as does semiannual testimony on monetary policy.
Sources of Independence
Central bank independence is in part the result of formal institutional features typically
incorporated in the legislation creating and defining the central bank.
The legislation creating an "independent" central bank--or in many cases revisions to such
legislation--often entirely takes away goal independence by mandating objectives for
monetary policy, but otherwise sets up a structure that confers and protects instrument
independence. The most important requirement for instrument independence is that the
central bank be the final authority on monetary policy. That is, monetary policy decisions
should not be subject to veto by the executive or legislative branches of government.
Instrument independence is further protected if other institutions of government are not
represented on the monetary policy committee. A lesser protection would be to allow
government representation but only in a nonvoting capacity.
Instrument independence is further facilitated by long, overlapping terms for members of the
monetary policy committee; by limited opportunities for reappointment; and by committee
members not being subject to removal except for cause--where "cause" refers to fraud or
other personal misconduct but explicitly excludes differences in judgment about policy. An

intangible contributor to independence, but arguably the most important, is the appointment
of a capable, respected, politically astute, and "independent minded" chairman.
A third important protection of independence is achieved by freeing the central bank from
the appropriations process. Many central banks have been granted the seignorage function-issuing currency for the government--and cover the cost of their operations from the
earnings on their portfolio of government securities acquired in the process, returning the
excess to the government.
Finally, it is critically important to ensure that the central bank will not be required to
directly underwrite government debt. As I noted above, the Treasury or Finance Ministry
will have an incentive to keep interest rates low to reduce the cost of servicing the
government debt. Indeed, perhaps the first principle of central bank independence is
independence from the fiscal authority.
If independence is also defined in terms of assuring the ability and commitment of the
central bank to achieve price stability, this commitment can be protected by an explicit price
stability mandate from the government. That is, a government that explicitly imposes this
mandate is less likely to interfere in a central bank's pursuit of this objective. Independence,
by this definition, is viewed as greatest if price stability is the exclusive objective of
monetary policy, or at least the principal objective.
Empirical Studies of the Relative Independence of CentralBanks
Studies of the economic consequences of central bank independence typically estimate the
economic effects by first deriving quantitative measures of the relative independence of
central banks and then estimating how this measure is correlated with average inflation,
inflation variability, and real economic performance. Reviewing three of these studies will
help to better understand the meaning and sources of central bank independence and
perhaps provide at least some insights into how the Federal Reserve ranks relative to other
central banks in terms of independence.
Bade and Parkin (1988) ranked the political independence of twelve industrial country
central banks on the basis of answers to questions such as Is the bank the final policy
authority? and Is there no government official (with or without voting power) on the bank
board? Grilli, Masciandro, and Tabellini (1991) also incorporated information on the length
of terms of monetary policy committee members and on policy goals of the central bank
with respect to monetary policy, specifically whether there is a mandate for monetary
stability (including money growth or price stability objectives). Cukierman (1992) also takes
into account restrictions on the ability of the public sector to borrow from the central bank.
A central bank is more independent if it is protected, for example, from directly underwriting
the government debt.
Germany (prior to its participation as part of the ECB) and Switzerland have been uniformly
ranked the most independent of central banks. The United States fell in the second tier in the
Bade and Parkin rankings; was just below the most independent central banks in the Grilli,
Masciandro, and Tabellini rankings of eighteen industrial countries; and was tied for fourth
place among seventy countries in Cukierman's rankings. The Federal Reserve lost points in
these rankings because of the brevity of the Chairman's term (less than five years) and the
failure to single out price stability as the unique or principal objective.
Of these studies, I prefer Bade and Parkin's methodology for ranking independence because
they included only those institutional characteristics that afforded a measure of

independence to the central bank. Grilli, Masciandro, and Tabellini and Cukierman also
included in their measures the nature of monetary policy objectives, ranking independence
higher if there is a price stability objective and, in Cukierman's case, higher still if price
stability is the only or at least principal objective. In the latter case, a central bank with more
discretion--for example, as a result of multiple objectives, as in the case of the United
States--is ranked as less independent than a central bank that has little discretion on account
of a single, precisely defined price stability objective. Of course, defining independence to
involve a mandate making price stability the single or principal objective increases the
potential for an inverse relationship between "independence" and inflation.
Accountability means being answerable for one's decisions. Implicit in being accountable is
being subject to discipline from whomever you are accountable to for the failure to live up to
your responsibilities. Making the central bank accountable in this way involves, by
definition, some compromise of the independence of the central bank. But accountability is
the critical mechanism for ensuring both that the central bank is operated in a way consistent
with democratic ideals and that the central bank operates under incentives to meet its
legislative mandate for monetary policy. On the other hand, as I noted earlier, steps to
increase accountability also create opportunities for political interference.
Every organization's performance is likely to be enhanced by appropriate incentives. In the
private sector, the incentives for a business are profitability and, indeed, survival. In the
public sector, other means must be found to provide incentives. Elections of course play this
role for elected officials. With central banks having been given an arms-length relationship
with the electoral process, some have suggested that central bank policymakers should
operate under explicit incentive contracts. But, for the most part, accountability is achieved
for central banks both through the appointment process and by regular oversight by the
Accountability is facilitated by providing the central bank with a specific, external (usually
legislatively imposed) mandate. Two aspects of designing the objectives for monetary policy
are important. First, a single objective (typically price stability) makes the central bank more
accountable, because multiple targets always carry trade-offs, at least in the short-run, which
are subject to the discretion of the central bank. Second, explicit numerical targets make
central banks more accountable than more general targets. Specifically, an explicit numerical
inflation target makes the central bank more accountable than a more general commitment
to price stability.
There are, however, other considerations that are relevant to setting the mandate. First, if
there is a single target for a central bank, it will surely be price stability, given that monetary
policy is the principal, even unique, determinant of inflation in the long run. While a single
target is more precise, few legislatures would tolerate a central bank disclaiming any
responsibility for the cyclical state of the economy or at least failing to respond to cyclical
weakness. Indeed, given the inescapable trade-off between inflation variability and output
variability, a central bank naturally, even inevitably, accounts for the variability of output
around full employment when deciding how rapidly to try to restore price stability in cases
where shocks or policy mistakes move the economy away from this goal. Inflation-targeting
central banks often take account of output variability by defining a period of time over
which any return to price stability should occur, typically two years. But such a fixed
boundary may not encompass the optimal response to all shocks.

A second consideration in setting the mandate is that flexibility can be a valuable asset for
policymakers, given the variety of shocks that the economy may face, structural changes
that could effect the nature of trade-offs faced by policymakers, and the possibility of
short-run trade-offs among multiple targets. So, less precise objectives and multiple targets
provide flexibility for the policymaker. To the extent that there is a single and explicit target,
accountability is narrowly about performance relative to that target. On the other hand,
when there are multiple targets and hence inherent shorter run flexibility and less precisely
defined targets, the oversight by the legislature will typically focus more broadly on the
judgments that the central bank has made in pursuing its legislative mandate.
A second source of accountability is through the reappointment process. If terms are short
and especially if the Chairman and other voting members can be reappointed for additional
terms, more control can be exercised through the appointment process, and committee
members can more easily be held accountable for their policy votes. This is a clear example
of the trade-off between independence (facilitated by long terms without the possibility of
reappointment) and accountability (facilitated by short terms with opportunities for
As I noted earlier, Federal Reserve Board governors are appointed by the President, subject
to Senate confirmation, for nominal fourteen-year terms. Such long, overlapping terms
facilitate independence. However, if a Board member resigns before his or her term has
expired, the successor is appointed for the remainder of that term. At the end of a partial
term, a governor can be reappointed for a full term, but reappointment is at the discretion of
the President and is again subject to confirmation by the Senate. Once a full term has been
served, no reappointment is possible. The average actual tenure of governors has been
between five and six years over the last twenty-five years.
However, the term of the Chairman and the Vice Chairman of the Board of Governors is
only four years and both can be reappointed for additional terms as Chairman and Vice
Chairman for as long as they remain on the Board. Such short and renewable terms reduce
independence but facilitate accountability. In addition, they provide an important
opportunity for the President to try to influence monetary policy decisions by pressures
exerted on the Chairman subsequent to appointment. To a lesser degree, appointment of
governors and direct pressure on them are further avenues of political influence that have
been employed, at least on occasion.
The authors of the Banking Act of 1935, which established the FOMC in its modern form,
implemented the system of long overlapping terms for governors and shorter renewable
terms for the Chairman and Vice Chairman. It seems to me they made a conscious effort to
balance independence and accountability. The short, renewable term for the Chairman
would enhance accountability and encourage a strong working relationship between the
Chairman and the executive and legislative branches. On the other hand, the long and
effectively nonrenewable terms for governors would protect the fundamental independence
of monetary policy. So the Federal Reserve loses points in some indices of independence
because of the short term of the Chairman, but the resulting balance between independence
and accountability has, in my view, contributed over the years to a successful relationship
between the central bank and the rest of government.
Transparency and Disclosure
Transparency and disclosure are also essential to accountability. Transparency refers to

being easily understood. With respect to monetary policy, it refers to the immediacy with
which the public learns of policy decisions and the amount of information provided about
the rationale for policy actions and the assessment of how possible future developments bear
on policy. The legislature, for example, needs information about the policy actions and an
understanding of the rationale for the policy if it is to be able to hold the central bank
accountable. In addition, it is generally agreed that markets work better with more complete
information, although some worry that a continuous flow of information on the leanings of
members of the policy committee can result in excessive volatility in financial markets.
The Congress has, over time, made efforts to increase the transparency of the monetary
policy process and widen the scope of disclosures of monetary policy decisions and of the
discussions leading up to those decisions. Historically, the Federal Reserve has responded
initially by trying to preserve the status quo, but over time it has come to accept and even
appreciate the evolution toward greater transparency and disclosure. Nevertheless,
continuing concerns have been the potentially deleterious effect of still greater transparency
and disclosure on the effectiveness of the deliberative process and the possible effects on the
volatility of financial markets.
Transparency is influenced by the operating procedures used to implement monetary policy.
It is furthered by announcements of policy changes, along with statements explaining the
rationale underlying policy actions, and by timely and sufficiently detailed reporting of the
substantive discussions leading to the policy decisions.
The Federal Reserve used to set its policy in terms of the tightness of reserve positions
(so-called "reserve market conditions"). This was a very imprecise way of setting and
explaining policy, making it more difficult for the public and the Congress to monitor and
evaluate monetary policy decisions. One of the developments of FOMC practice under
Chairman Greenspan was to set policy explicitly in terms of a target rate for the federal
funds rate. 2
Initially, these decisions were not directly conveyed to the public. Instead, the Federal
Reserve Bank of New York altered the way in which it implemented open market operations
to alert financial markets to the change in policy. In February 1994, the Federal Reserve
began announcing on the day of each meeting any change in its federal funds target and
formalized that decision in February 1995. At the same time, it began to offer a brief
statement explaining the rationale for the policy change. A policy of issuing a statement
even when there was no change in policy was implemented last year.
The effect of monetary policy derives not only from the explicit policy actions taken, but
also from expectations about future policy. Until quite recently, the Federal Reserve opposed
earlier release of its directive or minutes precisely because that would provide some hints
about prospects for future policy and this could result in volatility in financial markets.
Today, however, not only does the FOMC immediately announce its policy decisions and
provide a rationale for policy changes, it also reveals whether the committee believes the
risks to achieving its goals are balanced or unbalanced--and, if unbalanced, in what
direction. Since the early 1980s, the so-called tilt had been part of the directive, but in May
1999 the FOMC began to report changes in the tilt on the day of the meeting and, since that
time, the markets have focused considerable attention on what the Federal Reserve says
about the future.
Transparency is also enhanced by disclosure--including the announcement of policy actions

and of the rationale for policy actions, the release of a summary in the minutes of the
Committee's substantive discussion about the economic outlook and the appropriate course
of policy, and testimony before the Congress. The Federal Reserve releases minutes of each
meeting shortly after the following meeting--in effect, a delay of six or seven weeks. Some
have encouraged a further step toward enhanced transparency by speeding this release.
The transcripts of an entire year of meetings--lightly edited verbatim records of the
deliberations, with redactions for sensitive information related to foreign governments or
specific businesses or individuals--are released with a lag of five years. The decision to do so
was made in February 1995. Until late 1993, it was not widely known--inside or outside the
Federal Reserve--that verbatim records of FOMC meetings (transcribed from audio tapes)
were retained. Once the minutes were released, the tapes themselves were erased--actually
taped over--in conformance with Committee directives. When the Congress learned of the
availability of the transcripts, they demanded that they be released to the public, and the
current procedures were negotiated between the Federal Reserve and the Congress. The
transcripts are a useful historical record of FOMC meetings and provide scholars as well as
current Board members with insights into the monetary policy process and its evolution over
The Federal Reserve and the Executive Branch
Independence and accountability--as important as these concepts are--do not effectively
convey the full richness of the relationship of the Federal Reserve to the rest of the
government. The relationship in practice is, after all, as much informal as formal. Informal
relationships and, even the effectiveness of formal ones, also have a lot to do with
personalities as well as with institutional history and traditions. And these informal
relationships are, in turn, important channels for political influence.
One important reason for consultation and communication between the Federal Reserve and
both the executive and legislative branches is the desirability of effective coordination of
monetary and fiscal policies. The executive and legislative branches collectively set fiscal
policy, while the central bank sets monetary policy. The appropriate monetary policy must
give substantial weight to prevailing and expected fiscal policies. To a lesser degree, the
same principle is at work in the formation of fiscal policies. I say to a lesser extent because I
believe fiscal policies since the early 1980s have been set more on the basis of longer-run
considerations--such as promoting growth--than for short-run stabilization purposes. As a
result, stabilization policy is today principally a concern of the central bank except under
extreme circumstances. The forecast of the central bank must consider current and
prospective fiscal policies, and monetary policy must adjust to fiscal policy changes, while
the executive and legislative branches are somewhat freer to implement changes in long-run
strategies as the political consensus allows or dictates.
On the other hand, the absence of active stabilization efforts by the executive branch (and
the Congress) might increase their frustration about the stabilization policies pursued by the
Federal Reserve--or perhaps more likely at the perceived failure of the Federal Reserve to
pursue full employment aggressively enough--and increase efforts at political interference
with the conduct of monetary policy.
The relationship between the Federal Reserve and the executive branch has evolved over
the last half century toward a more informal and less structured relationship. The
Eisenhower Administration established an Advisory Board on Economic Growth and
Stabilization (ABEGS) which included the chairman of the President's Council of Economic

Advisers and the Fed Chairman--initially Arthur Burns and William McChesney Martin
respectively--plus cabinet members. With Arthur Burns in the lead, the ABEGS functioned
as a forum for frequent consultations on the policy mix. During that period, fiscal policy had
a more prominent role in stabilization policy, with monetary policy playing a more
supporting role. Some previous Fed Chairmen also have acted as close advisors to the
president--for example, Mariner Eccles for President Franklin Roosevelt and Arthur Burns
in the case of President Nixon--sometimes in discussions unrelated to the coordination of
stabilization policy.
The Kennedy-Johnson Administration inherited the recession of 1960-61 and was
determined to use fiscal policy to promote recovery. In the prelude to the 1964 tax cut,
Chairman Martin was included in policy discussions as part of a "Quadriad" consisting also
of the CEA chairman, the Secretary of the Treasury, and the director of the Budget Bureau.
Chairman Martin was included mainly to ensure that the Fed did not offset the expected
effect of the tax cut.
Coordination slackened as Vietnam War spending stimulated the economy, to the alarm of
Fed officials, leading to the December 1965 confrontation. This was the most dramatic
example of attempted political interference with the conduct of monetary policy after the
1951 Accord. The minutes of the meeting at which the Board decided to raise the discount
rate include interesting discussions of the tension between independence and coordination.
Some governors wanted to defer to, or at least negotiate further with, the Administration on
this issue because they viewed the Administration as having the primary responsibility for
the conduct of national economic policy. Should the Federal Reserve frustrate the direction
of that policy? And during the congressional hearings that followed there was much
discussion about the dangers to a ship with two captains.
Today, the interaction between the Federal Reserve and the Administration is more informal
but also perhaps more continuous. However, that relationship is less focused on monetaryfiscal policy coordination than on regulatory and international economic issues. This change
reflects the smaller role of fiscal policy in stabilization ever since the early 1980s, when the
Reagan Administration shifted the focus to longer-run issues related to encouraging more
rapid trend growth. Stabilization policy since that time has been dominated by the Federal
Reserve, with coordination of policies becoming especially important at major turning points
in the thrust of fiscal policy--for example, when the Clinton Administration decided to make
a reduction in the structural federal budget deficit the centerpiece of its economic policy
strategy in 1993.
The Secretary of the Treasury and the Chairman of the Federal Reserve meet frequently,
many times for breakfast or lunch, often two or three times a week. The meetings are
generally short, but not always, with no formal agenda and no staff. These meetings date
back to the Treasury-Federal Reserve Accord in 1951 but today, apart from telephone
consultations, they are the main source of ongoing contact between the Chairman and the
There are a number of other opportunities for regular contact among Federal Reserve
governors and members of the Administration's economic team. A governor (on a rotating
basis) hosts a weekly lunch for senior staff of the Treasury and the Federal Reserve. While
the meetings are often social as well as substantive, they are opportunities to discuss issues
of mutual concern. Some of the most effective meetings are "theme" meetings, when we
agree in advance to focus on a particular issue. Given the Treasury's respect for the

independence of the Fed, participants will rarely discuss monetary policy, although they
occasionally touch on the economic outlook. Regulatory issues, debt management, or
international economic issues tend to dominate. But the contacts made and refreshed at
these meetings are extremely constructive when discussions between the Federal Reserve
and Treasury are called for, again most often on regulatory issues.
Members of the Board and members of the CEA also meet monthly for lunch. Once again,
discussions of the economic outlook and monetary policy are rare. But the discussions often
involve interesting issues related to the outlook, such as the sources of the increases in
productivity growth and why most other countries have not benefited significantly thus far
from the same developments.
The President and the Chairman of the Federal Reserve meet occasionally--more recently,
generally a couple of times a year. These meetings typically are informal discussions without
agendas and without announcements before or after the meetings. They usually also include
the Vice President, the Secretary of the Treasury, and the President's chief of staff. These are
typically opportunities for the Chairman to brief the President on the U.S. and global
economic outlooks. The frequency of meetings between the Chairman and both the
Secretary of the Treasury and the President have varied across Chairmen and
Administrations, depending to an important degree on the individuals involved.
The Federal Reserve and the Treasury participate in a variety of working groups--including
the President's Working Group on Financial Markets. Treasury and Federal Reserve officials
often serve together on U.S. delegations to international organizations--including meetings of
G-7 and G-10 finance ministers and central bank governors; regional organizations such as
the Asia Pacific Economic Cooperation Council, the Manila Framework, and the Forum for
Latin American Central Bank Governors; the Financial Stability Forum, OECD Working
Party 3 and Economic Policy Committee, and G-22; and bilateral economic dialogues, for
example, with China and India. Before each such forum, it is typical for the U.S. delegation
to meet together to coordinate their participation. Consultations were intense during the
Mexico crisis in 1995, the Asian financial crisis in 1997-98, and in the discussions about
reforming the international financial architecture since these events.
The Federal Reserve and the Congress
As I noted earlier, the Federal Reserve's independence is a product of congressional
legislation and can therefore be diminished at the will of the Congress (with the President's
approval and subject to override of any veto). The Congress must have such authority of its
oversight of the Federal Reserve is to be credible and effective. This power is a rather blunt
instrument, providing ample opportunity for the Federal Reserve to take advantage of its
independence in the conduct of monetary policy. At the same time, it ensures that the
Federal Reserve is extremely respectful of the oversight authority of the Congress and
provides some leverage for congressional influence on the conduct of monetary policy. In
assessing congressional influence, it is also useful to distinguish between the views of a vocal
minority and the consensus view--insofar as it can be ascertained--of the Congress.
It is sometimes difficult to separate direct political involvement in monetary policy from
essential congressional oversight of monetary policy. Today it seems out of place for the
Administration to comment directly on the conduct of monetary policy, though this may
reflect the extraordinary relationship between this Administration and the Federal Reserve
and the exceptional economic environment of the last several years. Only time will tell. At
any rate, for the present, the relationship between the Administration and the Federal

Reserve on monetary policy is confined to the President's making appointments to the Board
while the members of the administration and the Board (and especially the Chairman and the
Secretary of the Treasury) engage in regular but informal consultations. On the other hand,
the Congress cannot fulfill its oversight responsibilities without actively engaging the Federal
Reserve in a dialogue about the conduct of monetary policy.
The Congress conveys its views on monetary policy through a variety of vehicles, including
letters, speeches, statements and questions at hearings, committee reports on monetary
policy, and bills and resolutions. The Congress over the years has used a variety of
approaches to influence monetary policy. Perhaps most important, the Congress has set the
goals for monetary policy in law. In addition, the Senate confirms nominees to the Board of
Governors, and individual Senators can hold up Board member confirmations in an attempt
to influence policy and appointments. The Congress can, if it decides, pass legislation that
directly requires a specific monetary policy action. The Congress can threaten to change the
structure of the Federal Reserve--abolish the Federal Reserve at the extreme, or specify
particular qualifications for Board members, or alter the composition of the FOMC--in an
attempt to influence monetary policy. The Congress can demand an accounting of policy by
summoning the Chairman, Board members, and Reserve Bank presidents to congressional
hearings, in addition to the formal semiannual testimonies by the Chairman.
The line between oversight and direct involvement in the conduct of policy is perhaps
crossed when the Congress passes or even introduces a resolution or legislation that gives
specific direction to raise or lower interest rates and, especially, when such directions are
accompanied by proposed legislation that would reduce the independence of the Federal
The history of the past twenty years shows that members of the Congress do try to influence
monetary policy, especially when the economy is performing poorly or when interest rates
are high or rising, but that the Congress has rarely gone so far as to pass legislation to direct
policy. In fact, such legislation has often been introduced, though rarely passed. Indeed, the
introduction of such legislative mandates may be thought of as one way the Congress tries to
persuade the Federal Reserve to alter its conduct of monetary policy.
There are, to my knowledge, only one or two examples of legislation that passed with
specific monetary policy directives and thus compromised the delegation of instrument
independence to the Federal Reserve. I mentioned previously Concurrent Resolution 133
passed in 1975. At the end of November 1982, forty-two Senate Democrats introduced a
resolution calling on the Fed to "achieve low enough interest rates to generate significant
economic growth and thereby reduce the current intolerable level of unemployment." The
Democratic House approved this language in its version of the year-end continuing
resolution. However, the final language in the continuing resolution included an important
qualification that, in effect, left the discretion about the conduct of monetary policy to the
Federal Reserve. Specifically, the Congress added the qualifying phrase "with due regard for
combating inflation." This is an excellent example of the broader tension in the relationship
between the Congress and the Federal Reserve. On the one hand, the Congress honors the
Fed's independence in establishing policy and, on the other hand, individual members,
particularly in difficult economic times, work to influence policy.
At the most extreme end of efforts to change the structure of the Federal Reserve, bills have
been introduced to repeal the Federal Reserve Act (thereby abolishing the Federal Reserve),
to abolish the FOMC, to remove Reserve Bank presidents from the FOMC, or even to

impeach Chairman Volcker and all the members of the FOMC at that time. Congressman
Henry Gonzalez, a longstanding member and ultimately chairman of the House Banking
Committee, brought a special zeal to these efforts and over the years was the author of
several such measures.
In return for granting the Federal Reserve "independence," it seems to me that the Congress
asks three things of us. First, we must do a good job promoting the objectives that the
Congress has identified. Second, we have to accept a certain amount of grumbling about the
decisions that impose short-run costs, especially when unemployment is high or policy
tightens preemptively to contain what the Fed perceives as inflation risks. We are always the
one taking away the punch bowl just as the party is getting good, with members of the
Congress among those who always question the timing of any restraint. To be fair, members
of the Congress are among the first to congratulate us when we lower rates! And there has, I
have to admit, been plenty of praise for the Federal Reserve's contribution to the recent
exceptional economic performance. Third, the Federal Reserve must be fully prepared to get
a substantial part of the blame for bad results (whether or not we caused them).
The Congress keeps its part of the bargain by leaving the core of our operations alone, so
long as things go right, and intervening only around the edges (hearings, speeches, letters,
and the introduction of an occasional bill or resolution) to show they remain alert to their
oversight responsibilities and reflect the concerns of their constituents.
The appointment process is an important element of the relationship with the Congress.
Governors are subject to confirmation by the Senate. The confirmation process is a way for
the Congress to influence the conduct of Federal Reserve policy, just as the appointment
process offers this opportunity to the President. When the President and congressional
majority are from different parties, party politics can affect the Federal Reserve and may
explain, in part, why today the Board has two vacancies plus a governor who is serving after
the expiration of his term (since a governor can continue to serve in such a case until
reappointed or until a new governor is appointed and confirmed).3 In recent years, delayed
action on nominations for governor or renomination as chairman, has served as a vehicle for
some Senators to express displeasure with the conduct of monetary policy.4
Another important relationship with the Congress is through hearings. The Chairman testifies
frequently before the Congress, with the one-year record being twenty-five appearances in
1995, although only seven were directly about monetary policy. Other governors testify also,
though less frequently, with a range of eight to twenty-two appearances per year in recent
years. Typically the Chairman alone testifies on monetary policy. The most important
testimony on monetary policy is delivered at semiannual hearings before the House and the
Senate that began, as I mentioned, with the now-expired provisions of the HumphreyHawkins act. From 1978 until today, these were semiannual appearances, in each case
before the Senate and the House. But the Chairman is invited for many other hearings,
including appearances before the budget committees, the Joint Economic Committee, and
the banking committees.
In addition, on rarer occasions, the Chairman and other Board members will visit with some
members of the House and the Senate, either at the Board or on the Hill, mostly at the
request of the legislators. These meetings are rarely about monetary policy and most focus
on regulatory issues, including banking bills and the Community Reinvestment Act, but they
are also sometimes about global economic developments, international financial crises, or
international financial architecture issues. In addition, contact at the staff level between the

Board and congressional committees is common. The Board's staff is routinely asked for
technical assistance in drafting legislation on banking, consumer protection, and
amendments to the Community Reinvestment Act and other areas.
Finally, members of the Congress often write letters to the Board--individually and in
groups--typically urging a specific direction for monetary policy. Since joining the Board in
June 1996, I have seen numerous such letters--all either expressing concern about high
interest rates or, in most cases, urging the FOMC either to not raise interest rates or to lower
them. The largest number of signers during this period was eighty, for a September 23, 1996
letter urging the FOMC not to raise interest rates.
These letters are perhaps best understood as attempts by the Congress to alert the Fed to the
pain of constituents as a byproduct of the conduct of monetary policy--typically when the
Fed is preemptively raising interest rates in an effort to prevent higher inflation or trying to
unwind an earlier increase in inflation, or not sufficiently stimulating a sluggish economy.
Once having admonished us in an effort to make sure we understood the consequences of
our policies, the Congress has generally relied on us to balance inflation and stabilization
objectives, as is the implicit contract under a regime under which the Congress has delegated
instrument independence to the Federal Reserve.
Outstanding Issues Related to Independence and Accountability
In my judgment, the Federal Reserve Act--together with the policymaking structure as
amended by the Banking Act of 1935, the policy mandate as introduced in 1977 and 1978,
and the informal relationships that have evolved--results in an excellent balance of
independence and accountability for the Federal Reserve. Nevertheless, the resulting
balance offers opportunities for political influence so that sustaining Federal Reserve
independence in practice depends on building a tradition of independence within the Federal
Reserve and on the strength of will and public prestige of Chairmen, in particular, but also of
other FOMC members, in resisting efforts at political control. Also, controversies linger
about whether or not the policy mandate should be refined and whether transparency and
disclosure should be further enhanced.
The legislative mandate under which the Federal Reserve operates is, as I noted earlier,
different from the mandate applied to most other central banks. It explicitly sets out a dual
mandate and, should there be short-run conflicts, does not identify any priority between the
two objectives. There has long been a small group in the Congress who would like to revise
the language related to the policy mandate to elevate the role of price stability to the single
or at least principal objective for monetary policy. They press this issue not out of
dissatisfaction with the conduct of monetary policy but because they believe such a revised
policy mandate would strengthen the credibility of the Federal Reserve's commitment to
price stability and thereby allow the central bank to carry out this commitment in the most
efficient way. However, a larger, if less vocal, group in the Congress strongly opposes
abandoning a commitment by the Federal Reserve to promote full employment through its
conduct of monetary policy.
A related issue is the precision with which the objectives should be stated. The mandate, for
example, sets out full employment and price stability as objectives but leaves to the Federal
Reserve the precise definition of those goals. As recent experience confirms, it would be
difficult and unwise to set any numerical target for full employment, given the uncertainty
about what that target should be and the likelihood that this target would vary over time with
demographic changes in the labor force, government policies, and changes in the efficiency

of the matching process between jobs and unemployed workers. The Federal Reserve has
never set an explicit numerical target for inflation. Chairman Greenspan has defined price
stability as inflation so low and stable that it no longer affects the decisions of households
and businesses. However, today, a growing number of governments have set explicit
numerical targets for their central banks.
A second broad issue has to do with transparency and disclosure. Over the years, there has
been an evolution toward greater disclosure and transparency, but some believe that we
ought to be looking for opportunities for further progress. The major questions relate to the
speed of release of the minutes and of the transcripts.
The key to the effective operation of the central bank within government is a well-designed
policy mandate; a high degree of formal instrument independence; complementary informal
relationships to ensure appropriate coordination without undermining instrument
independence; a disciplined, regular process of legislative oversight; and a high degree of
transparency and disclosure. The result is a good balance among government-mandated
objectives, instrument independence, flexibility, and accountability. But this very balance
keeps open opportunities for political interference and requires continuing energy and
focus--both inside the Federal Reserve and within the rest of government--on sustaining the
independence of the Fed. As a result, we should not take the independence of the Fed as
unassailable but rather as a principle that has to be defended.
Bade, R., and M. Parkin. "Central Bank Laws and Monetary Policy," Working Paper,
Department of Economics at University of Western Ontario, October 1988.
Barro, Robert J., and David B. Gordon. "Rules, Discretion and Reputation in a Model
of Monetary Policy," Journal of Monetary Economics, vol. 12, no. 1, July 1983, pp. 101-21.
Briault, Clive, Andrew Haldane, and Mervyn King. "Independence and Accountability,"
Working Paper Series, no. 49, Bank of England, April 1996.
Brimmer, Andrew F. "Politics and Monetary Policy: Presidential Efforts to Control the
Federal Reserve," before 75th Anniversary Luncheon, Board of Governors of the Federal
Reserve System,
November 21, 1989.
Cukierman, A. Central Bank Strategy, Credibility and Independence: Theory and
Cambridge, Mass.: MIT Press, 1992.
Debelle, G., and S. Fischer. "How Independent Should a Central Bank Be?" mimeo, MIT,
Greider, William. Secrets of the Temple: How the Federal Reserve Runs the Country. New
York: Touchstone, 1989.
Grier, Kevin. "Congressional Influence on U.S. Monetary Policy: An Empirical Test,"
Journal of Monetary Economics, October 1991, pp. 201-20.

Grier, Kevin. "Presidential Elections and Federal Reserve Policy: An Empirical Test,"
Southern Economics Journal, vol. 54, no. 2, October 1987, pp. 475-86.
Grilli, Vittorio, Donato Masciandro, and Guido Tabellini. "Political and Monetary Institutions
and Public Financial Policies in the Industrial Countries," Economic Policy: A European
Forum, vol. 6, no. 2, October 1991, pp. 341-92.
Havrilesky, Thomas M. The Pressures on Monetary Policy. Boston, Mass.: Kluwer
Academic Publishers, 1993.
Kydland, Finn E., and Edward C. Prescott. "Rules Rather Than Discretion: The
Inconsistency of Optimal Plans," Journal of Political Economy, June 1977, pp. 473-91.
Lohman, Susanne. "Optimal Commitment in Monetary Policy: Credibility vs. Flexibility,"
American Economic Review, vol. 82, no. 1, March 1992, pp. 273-86.
Minutes of the Board of Governors of the Federal Reserve System, December 3, 1965.
Nordhaus, William D. "The Political Business Cycle," Review of Economic Studies, vol. 42,
no. 2,
April 1975, pp. 169-90.
Rogoff, Kenneth. "The Optimal Degree of Commitment to an Intermediate Monetary
Target," Quarterly Journal of Economics, November 1985, pp. 1169-90.
Schwartz, Anna J. "Central Banking in a Democracy," Western Economic Association, July
Tufte, Edward. Political Control of the Economy. Princeton, N.J.: Princeton University
Press, 1978.
U.S. House of Representatives. An Act to Lower Interest Rates and Allocate Credit.
Hearings on H.R. 212 before the Subcommittee on Domestic Monetary Policy of the
Committee on Banking, Currency and Housing, 94th Cong., first sess., February 4-6, 1975.
Washington, D.C.: U.S. Government Printing Office, 1975.
U.S. House of Representatives. The Federal Reserve Accountability Act of 1993. Hearing
before the Committee on Banking, Finance and Urban Affairs, 103rd Cong., first sess.,
October 13, 19, and 27, 1993, Washington, D.C.: GPO, 1994.
U.S. Senate. Monetary Policy Oversight. Hearings on S. Con. Res. 18 before the Committee
on Banking, Housing, and Urban Affairs, 94th Cong., first sess., February 25-26, 1975.
Washington, D.C.: GPO, 1975.
Walsh, Carl. "Optimal Contracts for Central Bankers," American Economic Review, vol. 85,
no. 1, March 1995, pp. 150-67.


1 During the debate on the Banking Act of 1935, Carter Glass expressed the view that
having the Secretary of the Treasury on the Federal Reserve Board resulted in enormous
influence by the Administration over the decisions of the Board. He felt he had been able to
get the Board to do whatever he wanted when he was Secretary of the Treasury in 1919.
Certainly his predecessor as Treasury Secretary, W.G. McAdoo, was a dominant presence
whenever he attended Board meetings. At the time, this arrangement didn't completely snuff
out Federal Reserve independence because the Reserve Banks were important in
formulating policy (more important than the Board through much of the 1920s). When the
FOMC was established in 1935, ensuring that a Board with all seats filled would have the
majority of the votes on policy decisions, it became imperative to end Administration
influence by removing the Secretary of the Treasury and the Comptroller of the Currency
from the Board.
2 It could be argued that policy began to evolve in this direction in 1983 when the FOMC set
targets for borrowed reserves. The latter target was, in effect, a proxy for the federal funds
rate. But the proxy was imprecise and it wasn't until the late 1980s that the committee
became clearer about its federal funds rate expectation.
3 When Susan Phillips' term expired on January 31, 1998, it took the Administration a year
and a half to nominate Carol Parry for that position. Alice Rivlin announced on June 4,
1999, that she would be resigning from the Board, but the President has not nominated
anyone to replace her. In the meantime, the President renominated Vice Chairman Roger
Ferguson to a full term as governor after the expiration of his short partial term on January
31, 2000. The Republican leadership of the Senate Banking Committee has refused to hold
hearings for either the new nominee, Parry, or Ferguson, reserving the opportunity for the
new President to make these appointments and therefore possibly to convert the positions
from Democratic to Republican appointments. In the meantime, the Board remains below its
statutory number of members and could remain so for the many months after the new
President takes office, if past experience is any guide to the time it takes to make
appointments and get them through the confirmation process.
4 A practice in the Senate called a "hold" allows a member--through his or her majority or
minority leader and without exposing his or her identity--to hold up, virtually indefinitely, a
vote on a nomination to the Federal Reserve Board or any other government position that
requires confirmation by the Senate. I have first-hand knowledge of this practice, since a
hold delayed the confirmation of my nomination for several months. Actually, the hold was
applied to the renomination of the Chairman, but the nominations of myself and Alice Rivlin
as governors were viewed as part of a package and therefore action on all the nominations
was delayed. Even without a formal hold, the chairman of the relevant committee has
discretion on whether or not to begin the confirmation process because the chairman
controls the scheduling of a hearing.
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