How to Hold the Federal Reserve Accountable to the Public Interest

The Federal Reserve, created by Congress in 1913 to strengthen the stability of the American banking system and charged in 1977 with a dual mandate of price stability and maximum employment, shapes how people experience the economy. As we learned in the Great Recession, for too long, the Federal Open Market Committee (FOMC) aligned itself more with the interests of large financial institutions than with everyday Americans. Yet in making monetary policy decisions, the FOMC can put a home loan within reach, make savings go farther, and tighten the labor market, giving workers more power to negotiate with employers.

The Fed, and central banks more generally, are most effective at monetary policy when they are least subject to short-term political influence; so goes a hard-won consensus among economists. This creates a lot of tension in a democratic society: Democratic governments derive their legitimacy from citizen approval, yet they assign power over key drivers of affordability and job creation for ordinary citizens to central banks that are explicitly charged with acting independently of politics.

Beyond its core monetary policymaking, where research shows central bank independence from short-term political influence delivers lower inflation, the Fed has taken on a growing number of functional and regulatory roles in the modern financial system. In these cases, the distance from political accountability that comes with independence has too often made the Fed less effective at delivering an economy that serves all Americans.

Our hope is this collection is the beginning of a more ambitious discussion of reforms to the Federal Reserve system that will deliver not only more accountability to the public and more democratic outcomes but a stronger economy for everyday Americans. This series lays out ideas that must inform a core set of democratic updates to the 21st-century Federal Reserve system’s monetary policy setting authorities, if it’s to perform its core macroeconomic role. These are a baseline set of needed reforms, not the full menu of reforms we need if we are to address the ways in which the Fed’s broader responsibilities are failing to serve the American people.

The Importance of Central Bank Communications

In an unprecedented time of political attacks on independent government institutions in general and Federal Reserve officials in particular, maintaining the central bank’s independent monetary policy–setting authority from political and financial influence has never been more important. But the Fed can and must also be accountable to the public—particularly by transparently communicating the policy work it does to maintain macroeconomic stability and strive for full employment.

Over the nearly 50 years of the modern Fed, its transparency and communication styles have varied but trended toward more openness. Former Fed chair Alan Greenspan released the FOMC’s first public policy statement in 1994. Former chair Ben Bernanke introduced regular press conferences explaining FOMC decisions in 2011, followed by the expanded Summary of Economic Projections, including the dot plot—a public chart that records each Fed official’s projection for the key short-term interest rate—as a form of “aggressive forward guidance” in 2012.

Reforms to Ensure Public Accountability

Acknowledging that monetary policy decisions affect everyone and their ability to access the financing, savings, and market-based retirement that make up a good life, the essays in this series explore how a Fed that maintains its independence in setting monetary policy can nonetheless be more accountable to the public interest.

Accountability to the public is key to both the Fed’s effectiveness and its legitimacy. Central banks will always have a constituency in financial markets, but during today’s widespread skepticism toward institutions and deteriorating public trust, communicating mainly with Wall Street will not substitute for accountability to Congress and the people it represents.

It’s clear that Congress has ceded ground on Fed oversight, and that the Fed must be a higher priority for legislators to deliver on key economic issues for everyday Americans: Warsh breezed through his confirmation hearing without answering a single question about how the Fed should respond to a recession.

To ensure the Fed’s independent monetary policy–setting authorities remain politically viable, Congress must reassert its responsibility to hold the Federal Reserve accountable to both wings of its dual mandate and to the American people. This will require investing in the expertise and capacity needed to better understand monetary and macroeconomic policy, which more frequent interactions and public communication may incentivize members of Congress to do.

A More Democratic, Accountable Fed

These essays suggest concrete first steps to better align the decisions of a democratic institution charged with maintaining a stable economy and full employment with the interests of the people living with the resulting economic conditions. These are neither a sufficient nor exclusive set of reforms for making the Fed more democratic, more progressive, and more effective.

The Fed should set monetary policy independently and free of outsized influence from both political pressure and the corrupting influence of financial markets, and of financial institutions specifically. But that should not put it beyond democratic accountability.

Congress, not the executive branch, authorizes the Fed and is charged with its oversight. Next year will mark half a century since Congress last revised the Fed’s monetary policy mandate. This essay series is focused on a small portion of the reforms that should be part of a long-overdue update of the Fed’s authorizing legislation to deal with its growing role in the 21st-century economy and financial system. Congress must proactively work with the Fed to ensure the interests of the public, not just those of Wall Street, are represented. A more transparent, more accountable Federal Reserve is not a less independent institution—it is one that can weather shifts in public opinion and preserve its authority and ability to set prudent macroeconomic policy.