A Century of Accommodation: The Failed Record of Federal Reserve Independence

While most monetary economists recognize that the Federal Reserve has allowed its monetary policy to be swayed by political influences at times – especially early in its history – there are few economists who question the independence of the Federal Reserve today. Even fewer monetary economists exhibit enough concern with political or special interest group pressures on the Federal Reserve to incorporate the considerations of political economy into their models and policy proposals. The authors challenge this paradigm. Throughout its history, even up until the current times, the Federal Reserve has continuously succumbed to political and special interest group pressures, and often at the most inopportune times. Existing empirical evidence on the independence of the Federal Reserve, while suggestive of a compromised Federal Reserve, fails to adequately capture the extent of influence of political and special interest groups (Boettke and Smith 2012). The authors supplement the existing theoretical and empirical evidence on Federal Reserve independence with a detailed history of the Federal Reserve’s acquiescence to both external and internal pressures. The historical record of the Federal Reserve calls for a much broader inclusion of the concerns of political economy into our monetary models, policy proposals, and structures.

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