Over the course of Fed history, we find a dozen and a half other episodes of major overhaul. Some empower the Fed, others limit its autonomy, and some, like Dodd-Frank, do both. Controlling for the duration of recessions, Congress is more likely to amend the Federal Reserve Act when inflation and unemployment tick substantially higher.
Congress is also more likely to act when electoral rewards are greatest. If one party controls both the White House and Congress, voters know whom to reward or blame. If the parties divide power, voters have a harder time.
Congress is more likely to threaten action than to take it. Using legislative records to document lawmakers’ attention to the Fed, we examined all the bills introduced in the House and Senate between 1947 and 2014 that address the power, structure and governance of the central bank. Over nearly seven decades, 333 House and Senate members introduced 879 bills.
Viewing the number of bills introduced each year (1947-2014) in the context of when the unemployment rate was above its median makes the pattern clear. When the economy hums, lawmakers leave the Fed alone. For example, congressional attention dropped markedly during Alan Greenspan’s Great Moderation starting in the 1980s, when the Fed tended to achieve its mandates. When the economy sours, most recently in the wake of the global financial crisis, reactive lawmakers pummel the Fed.
The Fed today remains caught in the cross hairs of partisan polarization. Republican proposals to limit its discretion, for instance, would require the Fed to adopt rate-setting monetary policy rules. Others want greater transparency from the Fed, such as allowing auditors to review monetary policy deliberations. Even though the current Fed is still occupied by Obama appointees, Democrats are also critical, favoring stronger limits on emergency lending.
Threats matter because they restrict Fed autonomy. Fed officials understand that responsiveness, sometimes even deference, to their congressional bosses lessens the chance that Congress and the president will revise the Federal Reserve Act.
Critics in Congress take aim at both monetary goals and tools. In July, the House financial services chairman, Jeb Hensarling, Republican of Texas, warned Ms. Yellen that the Fed should cease and desist from buying assets that venture into fiscal policy: “If we are not careful, we may wake up one day to find our central bankers have instead become our central planners.”
The Fed’s 2012 adoption of an inflation target also belies any notion of Fed independence. Ben Bernanke, then the Fed chairman, first broached the subject with his colleagues a decade earlier. Fed transcripts reveal acute sensitivity to securing congressional support. As Donald Kohn, then the Fed vice chairman, argued in 2008, “having an inflation target won’t have any effect if it is repudiated by the Congress.”
In the immediate wake of the financial crisis, the perceived political risk of setting a target again deterred Fed action. The Fed did not adopt its target until unemployment had finally subsided, years after the crisis. Even today, when former Fed officials recommend a higher inflation goal to generate greater growth, G.O.P. lawmakers direct Ms. Yellen not to change the target. Perhaps the Fed would be less eager to raise interest rates again if it could independently raise the inflation bar instead.
As President Trump thinks about whether to choose a new Fed leader, Ms. Yellen, whose term expires in February, and her colleagues have been busy normalizing monetary policy. A decade after the financial crisis and near generational lows in unemployment, the Fed is finally unwinding its four-plus-trillion-dollar balance sheet, gradually raising interest rates and keeping an eye on inflation that has been below the desired target.
This Fed seems eager to drop Mr. Bernanke’s crisis prescriptions. At her September news conference, however, Ms. Yellen reminded market participants that future policy makers would have a free hand to follow the Bernanke playbook the next time the country faces a financial crisis. Rates could return to zero, the balance sheet could be expanded, and so-called forward guidance could provide clear communication about future policy.
Political interdependence cautions against such certainty. Some of the contenders to replace Ms. Yellen, like Kevin Warsh and John Taylor, show little interest in Mr. Bernanke’s unconventional policies, underscoring the efficacy of congressional threats. And President Trump’s rare opportunity to overhaul the Board of Governors makes room for skeptics of the Fed’s financial crisis response.
A new Fed, backed by an expanding economy, may temporarily quiet the legislative critics. But whether in this presidential term or some later one, an inevitable economic slowdown — or a more serious financial panic — will surely restart the cycle of crisis, blame and reform.