The Fed – Independence, Yes, But Accountability And Limits

At this point it is clear that there is no single person in America, and possibly the planet who can influence markets as much as the Chairman of the Federal Reserve Board. The president may have more overall power (possibly) but in terms of moving markets for weeks at a time, that power primarily belongs to Mr. Bernanke. An unelected official with almost total control over the “board” he chairs.

Some have argued whether the Fed should even exist. I won’t go that far (it is beyond my scope), and I even understand why the Fed needs some independence. But I don’t understand why he isn’t accountable or why there aren’t limits.

The “Voting” Constraint

In theory the Fed has a board that votes. In fact there are actually 2 boards. The first is the Fed Board of Governors, which consists of 7 members (5 at the moment), appointed by the President and confirmed by the Senate for 14 year terms. The Board of Governors sets the discount rate and the reserve requirements. The second is the Federal Open Market Committee (FOMC), which consists of 12 members (10 at the moment), who are the 7 members of the Fed Board of Governors, the President of the Federal Reserve Bank of New York, and 4 other Presidents of the regional Federal Reserve Banks (on 1 year rotating basis). The Presidents of the other regional Federal Reserve Banks participate in the discussions but do not have a vote. Congress, effectively, no meaningful influence on the Fed since no appropriations come from Congress – Fed pays its bills from its own operations. FOMC sets the open market operations policy including the target Fed Funds rate.

In theory, the Chairman has the same one vote as the other members of the boards, but never in the history of the Fed has the chairman been on the losing side of the vote. In fact, multiple dissents are rare. The chairman may have the same vote but it is clear he is the leader. Whether the other board members are meant to be independent, there is a clear chain of command, and they are effectively subordinate to him regardless of what was intended. If the President of the United States wanted to call a board member directly, we have no doubt that it would be okay. If a board member called the President directly, I expect there would be repercussions. Only the chairman holds the post announcement press conference. He has the 60 minutes interviews. Whatever the intention was, it is impossible to argue that in practice the Fed Chairman is the boss of the others, and the idea of “team” is more reminiscent of the baseball bat scene in the “Untouchables” than a meeting of peers.

“Need To Know”

Why is there such a “need to know” level of secrecy surrounding many of their policies. The Government Accountability Office (GAO) does audit the Fed but its oversight of the Fed system is limited to areas outside of monetary policy. In fact, the “GAO can’t review most of the Fed’s monetary policy actions or decisions, including discount window lending (direct loans to financial institutions), open-market operations and any other transactions made under the direction of the Federal Open Market Committee. It also can’t look into the Fed’s transactions with foreign governments, foreign central banks and other international financing organizations.” Fed Audit