As attention turns to the leadership of the Federal Reserve, there have been some alarming concerns regarding the risk to the Fed’s supposed “independence.” The statements around this issue often overlook the essential need for democratic accountability and, notably, the U.S. Constitution.
Students are taught that our Constitution establishes three branches of government: executive, legislative, and judicial. It isn’t permissible for the Federal Reserve to act as a completely independent “fourth branch.”
The Constitution assigns Congress the duty of “regulating money,” and it has given the Federal Reserve the authority to manage this task. Hence, it’s crucial that Congress functions as the supervisory entity over the Fed.
However, under current laws, the Fed has accrued powers that resemble those of an independent monarchy rather than a parliamentary body. In fact, its authority appears to surpass that of all other federal agencies and most central banks around the globe.
- Budget: Unlike other institutions, the Fed holds exclusive control over its budget for operations and building expenses. By contrast, other major central banks seek budget approval from oversight bodies (for instance, Canada, Norway, Sweden, Switzerland, and England).
- Asset purchases: In the last two decades, the Fed’s balance sheet has grown exponentially. Between 2020 and 2021, the Fed’s asset purchases introduced notable interest rate risks for taxpayers, totaling over one trillion dollars.
- Debt issue: The Fed can independently acquire funds from the public to cover operational losses. While Congress is tasked with overseeing state debts, the Fed’s obligations are not subject to the same debt limits.
- Salary: The Fed independently determines salaries for its employees, some of whom earn more than the president. In fact, top salaries at the Fed are almost double those in other federal agencies.
- Building: The Fed is currently completing $3.1 billion in upgrades across three facilities, which will accommodate about 2,400 employees. This will make its headquarters one of the most expensive structures globally, while the European Central Bank is downsizing to two buildings at its site in Frankfurt.
- External review: While the Government Accountability Office audits most federal agencies thoroughly, its review of the Fed is quite limited. Furthermore, Fed inspectors are appointed by the Fed Chairman and work “under the authority, direction and control” of that Chair on policy matters. In contrast, the Bank of England benefits from an Independent Evaluation Office, and the performance of the European Central Bank is reviewed by the European Court of Auditors.
The internal governance structure of the Fed was designed as a committee, ideally comprising various experts accountable for their responsibilities.
For nearly a century, leaders of the regional Federal Reserve Banks were appointed by their boards with minimal oversight from the Federal Reserve Committee in Washington, D.C.
However, since 2015, the Fed Committee has become actively involved in the selection process of new bank presidents, altering its previous role into something closer to supervisory.
The Federal Reserve Committee consists of seven members with staggered terms, creating a scenario where the Fed Chair resembles a “first among equals,” akin to a Supreme Court Justice. However, in practice, the chair often assumes a much more dominant position as the Active Executive Officer, while other officials hold more peripheral roles.
This means staff are accountable solely to the Fed Chair, determining which information will be disseminated to the broader committee. For instance, a critical report on the collapse of Silicon Valley Bank was published in 2023, despite the fact it had not been shared with several board members prior to its release.
While the Fed isn’t literally a monarchy, its characteristics can feel quite monarchic. The lack of transparency and accountability within the Fed raises concerns about its reliability and effectiveness in executing its mandates.
Thus, Congress should act promptly to fulfill its constitutional responsibility and oversee the Federal Reserve.
The Fed should be included in the federal budget. Consistent with other major federal agencies, the Fed should have a Presidential Advisor on its governance, and the GAO should be allowed to conduct detailed assessments of its operations.
A Blue Ribbon Committee should also examine the Fed’s structure and propose specific recommendations for Congressional consideration.
