Sunday, March 27, 2016

Congressional Attention to Monetary Policy over Time

The Federal Reserve describes itself as "an independent government agency but also one that is ultimately accountable to the public and the Congress...Congress also structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes."

The independence of the Fed is by no means fixed or guaranteed. Rather, the Fed continually attempts to defend its independence. As Dincer and Eichengreen (2014) note, the movement of central banks toward greater transparency can be understood in part as an effort to protect independence by demonstrating accountability outside of the electoral process. They explain that "calls to audit the Federal Reserve have intensified as the central bank has come to rely more extensively on unconventional policies and expanded the range of its interventions in securities markets. The FOMC’s decision to make more information publicly available can thus be understood as an effort to reconcile the increased complexity of its operations with the desire to maintain and defend its independence."

The Fed derives its authority from Congress, and Congress can alter the Fed's responsibilities (and decrease its independence) by statute. Since the financial crisis, congressional calls for more oversight of the Fed or for less discretion by monetary policymakers abound. In National Affairs, Steve Stein writes:
"The independence of the Federal Reserve may well be more threatened in the coming years than at any time in the 100-year history of America's central bank. That independence could prove impossible to protect as long as the Fed continues to exchange its role as a defender of monetary stability for a new role as the ultimate overseer of the financial system. That new role is an inherently political one, and the Fed cannot expect to be permitted to perform it without interference from the democratically elected institutions of our political system."
It is difficult to measure the level of "threat" to Federal Reserve independence, but some indicators of Congressional attention to monetary policy are available. The Comparative Agendas Project tracks data on policy agendas, including hearings and bills, across several countries. Congress may use monetary policy-related hearings or bills as a form of signal to the Fed--an indirect form of political pressure or warning.

The figure below shows the number of bills in the U.S. Congress related to interest rates or monetary policy over time. Unsurprisingly, the 1970s and early 80s saw the largest number of such bills. The 1973-74 Congress considered 101 bills about interest rates and 55 about monetary policy. But the 2009-10 and 2011-12 Congress considered just 15 and 22 bills about monetary policy, respectively, which is low by historical standards.

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The next graph, below, shows the number of Congressional hearings on interest rates and monetary policy. These also peaked around the late 1970s. Since then, however, while hearings on interest rates have dwindled, hearings on monetary policy remain frequent--typically 10-20 per year. There is a mild upward trend from 2005 to 2012. Still, by neither metric of bills nor hearings is the Fed facing an unprecedented era of Congressional meddling.
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  1. I'm a long time reader but haven't commented before...

    Are you familiar with Schonhardt-Bailey’s work? ( If not, you might find it interesting. Her analysis of the Congressional hearings, of the Q&As after the semi-annual testimonies, and of the chair confirmation hearings offers a pretty grim view (if a recall correctly, been a while since I read it) on the quality of Congressional oversight on policy from the Great Moderation until the start of the current crisis. Most of the time, oversight committee members are more interested in getting a comment from Greenspan about their pet fiscal project than about something related to monetary policy. This would seem to be connected to the Volcker revolution and to a low and stable inflation rate becoming the main thing one would expect from a central bank. As this happened, and low and stable inflation actually materialized, Congress seems to have quit caring about the substance of monetary policy. In this sense, looking at the quantity of hearings per se does not give much info about whether there is political pressure on the central bank or not. (Before Volcker the Fed really wasn’t independent of politics in the modern sense, I suppose) Thinking about the events during the crisis (that are mostly out-of-sample regarding the book), I would say off the top of my hat that Fed-bashing became much more intense i.e. the quality of hearings changed. Also, on the legislative front, the Audit the Fed and Rules-based policy proposals would really change the making of monetary policy. I don’t know anything about the bills that you cite in your post but I would guess that before the crisis they don’t involve anything equally radical.
    A couple quotes from Schonhardt-Bailey:
    “An interim conclusion is therefore that taken at face value members of Congress and Fed chairmen talk across each other in oversight hearings. The content of their remarks is quite distinct. But further analysis suggests that the picture is not so simple. At the least members of Congress are seeking to "recruit" a successful Fed chair to support their view on a range of associated policy issues. Thus, while monetary policy is the stated focus of the hearings, there is a lot more going on in the actual discourse.”
    “As this exchange between Bunning and Bernanke illustrates, challenges to the Fed in the early 2000s were less on the substance of monetary policy and more on the mechanisms of transparency. This less confrontational atmosphere (at least on the fundamentals of policy) is indicative of the changing nature of congressional oversight on monetary policy over this period.”
    “Our first conclusion is that members of Congress demonstrated very limited interest in debating the more technical details of monetary policy with successive Fed chairmen. The evidence indicates that this interest declined further over time (i.e., for the Greenspan and Bernanke periods, no party was significant for a monetary policy thematic group aside from labor markets). Thus, at least with respect to the details of monetary policy, members of Congress appear more passive than active (i.e., more willing to listen than to speak). Apart from where monetary policy might affect jobs, members of Congress appear uninterested in the details of monetary policy-making. Reasons for this passivity may well vary from member to member, but there are likely to be some commonalities. We return to this in our interviews chapter, where we ask our respondents to comment specifically on this finding.”
    “In sum, our conclusion here is that members of Congress of both parties failed to probe very deeply or consistently the issue of financial stability in the years leading up to the crisis. Where questions were asked of Greenspan, generally the answers were lengthy and the questioner usually accepted the response with no further dialogue or follow-up.”

    1. Thank you! I will definitely check that out.

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