Ben Bernanke told lawmakers earlier this summer that he sleeps fine. “I need to be well rested,” the Federal Reserve Board chairman said. But restless nights could lie ahead. The central bank chief has plenty to worry about. Economic data appear to be softening, and the Fed is weighing whether to take action during a campaign season—it could come as soon as next week—amid calls from the Left to do more and warnings from the Right to hold fire.
But perhaps most significant over the long run are the intensifying attacks on the Federal Reserve’s independence. A movement on Capitol Hill that was once relegated to small pockets on the extreme right is becoming increasingly mainstream. And with that comes rising odds of a change down the road to the bank’s mission and operations, as well as its opacity.
The House passed legislation this week to open the Federal Reserve’s monetary-policy decisions to congressional scrutiny. It’s Bernanke’s “nightmare scenario,” he told lawmakers this month. That the legislation is not expected to advance in the Senate should be of little comfort to the central banker. It passed the House with broad bipartisan support on a 327-98 vote, revealing a torrent of dissatisfaction. “While I don’t share the view that we should abolish the Fed, or that the Fed’s activities are necessarily malicious, I do believe that the American people have a right to know how decisions about interest rates and other policies that impact their day-to-day lives are made,” said Rep. Mazie Hirono, D-Hawaii, in an extension of remarks submitted to the Congressional Record.
Congressional antipathy toward the central bank has ebbed and flowed with the health of the economy for years. “There’s been a long, long tradition of various members of Congress, sometimes from the Left, sometimes from the Right, wagging their fingers sternly at the Fed, playing to the cameras but not really doing anything,” said Alan Blinder, a Princeton University economist who served as vice chairman of the Board of Governors of the Federal Reserve System in the mid-1990s.
Support for measures to alter the Fed’s independent status has also waxed and waned. Some in the series of bills put forth by Rep. Wright Patman, D-Texas, from the 1950s to the 1970s had “scores of cosponsors,” Virginia Commonwealth University economist William Harrison wrote in a 1981 account of Patman’s efforts to make the bank more accountable to Congress. But Harrison concluded, “Despite numerous investigations, reports, and pieces of legislation, Patman’s crusade failed to achieve its objectives.”
The latest round of attacks feels different to Fed-watchers. “We’ve had bills like this many times before,” economist Allan Meltzer said of the recent legislation. “The difference now is, it is getting a lot of support.”
The financial crisis is the likely reason. The lack of trust and anger toward the bank over the past few years has felt “larger than is typical,” according to Karen Dynan, who served on the staff of the Fed’s Board of Governors for 17 years and is now vice president and codirector of the economic-studies program at the Brookings Institution. Not only do many people believe that the Federal Reserve Board contributed in some ways to the financial crisis but the bank has also exercised additional powers through its use of unconventional monetary policy during the crisis and its aftermath, she said.
Although polling on public sentiment toward the Fed is spotty and comes with caveats, all signs point to a downward slide over the past decade. “If public support erodes seriously enough, for a long enough time,” Blinder says, “the legislature is going to take action.”
Indeed, public input spurred most of the 274 lawmakers—including 45 Democrats—who cosponsored this week’s Fed transparency bill to act, according to Jeff Deist, chief of staff for Rep. Ron Paul, R-Texas, who introduced the measure. However, it’s unclear just what effect a bill like Paul’s would have in practice.
Blinder worries that Congress would use the legislation to sic the Government Accountability Office, which would carry out the audit, on the Fed whenever it was displeased with the bank’s actions. “It’s just another weapon that hostile members of Congress can use to beat on the Fed, and try to bend the Fed to its will,” Blinder said. The audit would grant Congress access to the information that the Fed uses to determine monetary policy, which is currently exempt from GAO review.
Bernanke worries that the legislation would subject the Fed to just that kind of political pressure and impinge on the bank’s ability to meet its dual mandate of promoting full employment and price stability. Lawmakers could order a GAO audit of every decision they disagree with, something the Fed chief fears would have a “chilling effect” on its actions, perhaps causing the bank to be excessively cautious.
Meltzer, though, is not so sure the current bill would do much—not because it wouldn’t be used as a political weapon, but because members of the bank’s policy-setting Federal Open Market Committee would find ways around it. If its meetings are required to be open, he said, it’ll just take the discussion out of the room.
Because Paul’s bill is not expected to advance in the Senate, it is more important for what it represents—anger at the Fed and the status quo—than for what it might do. Whether cries for change grow louder or diminish will hinge on the economy’s performance over the coming months. But the unique postcrisis position of the Fed means it has an especially high hill to climb if it wants to rekindle broad favor in Congress.
This article appears in the July 28, 2012, edition of National Journal.