New Report: The Case for Reforming the Federal Reserve’s Governance

Overhauling the Fed’s institutional design would lead to better monetary policy over time by balancing the competing needs of democratic legitimacy and independence

NEW YORK, NY — The Federal Reserve’s record in recent years raises questions about whether it has been operating in line with the best practices of central bank independence. Its unique structure—including removal protections, lengthy terms, and private ownership of the Reserve Bank system—is meant to ensure the independence of monetary policy and deliver superior monetary outcomes over time. However, in a new Manhattan Institute report, former Treasury Department senior advisors and current Manhattan Institute adjunct fellows Dan Katz and Stephen Miran argue the Fed’s current governance structure is inadequate to deliver the meaningful benefits that central bank independence should provide.   

In practice, the Fed’s institutional design has morphed into unchecked and broad-ranging authority, tempting the Fed into straying beyond its democratically bounded role. The expansion into credit allocation and environmental regulation, for instance, places the Fed squarely in politically charged territory, belying its claim to nonpartisan objectivity. More importantly, the Fed’s lack of accountability has polluted the monetary policy process, such as when the Fed unilaterally reinterpreted its mandate to aim for “sustained” inflation overshooting, contributing to two years of declining real incomes and the highest inflation in four decades.  

To increase the Fed’s insulation from short-term political pressures while enhancing its accountability and democratic legitimacy, Katz and Miran propose a series of reforms, including:

• Restructuring the appointment conditions of Fed Governors and Reserve Bank Presidents by shortening term lengths, imposing cooling off periods on further executive branch service, and altering removal protections to allow for accountability for poor performance;
• Reforming the Reserve Bank system to replace private ownership and influence on governance by local special interests with real accountability at the state level;
• Altering the structure of the Federal Open Market Committee (FOMC) to enhance the relative power of the Reserve Banks in setting monetary policy, with the goal of creating “monetary federalism” whereby the state-influenced Reserve Banks balance the D.C.-based Board of Governors to provide a check against political pressure influencing monetary policy;
• Cordoning off nonmonetary policy functions such as bank regulation and crisis response from the FOMC to further insulate the setting of monetary policy from political pressures.
• Subjecting the Fed’s budget to the congressional appropriations process to enhance ongoing oversight of and accountability to Congress. 

Click here to view the full report.