The Federal Reserve in 1937: It’s come a long way. Photo courtesy of the Library of Congress.
This week, Ben S. Bernanke finishes his no-doubt historic tenure at the helm of the Federal Reserve. There have been many assessments of Bernanke’s likely economic legacy focused on Bernanke’s leadership during the global financial crisis and the deep recession that ensued. But as a political scientist, I’d also encourage us to think about Bernanke’s political legacy: What (if any) have been Bernanke’s contributions to the Fed’s standing in our political system?
The concept of the Fed chair’s political legacy might strike macroeconomists and central bankers as incongruous: Bernanke typically emphasizes that the Fed makes policy immune from politics. As recently as last week at the Brookings Institution, Bernanke argued that “the day that we allow those short-run political pressures to make us do something which is not the right thing for the economy, then our independence at that point is effectively gone.” But the Fed always faces a tradeoff between independence and democratic accountability. That tradeoff is arguably most acute in the wake of financial and economic crisis, when lawmakers are likely to reconsider their commitment to fully autonomous central banks in light of the distributional consequences of the Fed’s policy choices. In other words, the Fed’s political legacy might be as important as its economic legacy, particularly given the intense political scrutiny of the Bernanke Fed.
There are many ways to think about Bernanke’s political legacy. Here, I focus on just two dimensions.
First, the Bernanke Fed will be remembered for drawing back the curtains of a secretive Fed (even if not as far as some critics would like). Appearing on 60 Minutes, lecturing at GW, instituting news conferences after many FOMC meetings — these public-embracing steps signal the Fed’s recognition that it needed to explain its policy choices in the wake of the financial crisis. Moreover, such developments suggest the Fed’s awareness that it needed to defend its policy choices on the grounds that they aided Main Street (albeit by first saving Wall Street). Granted, Bernanke is not the first Fed chair to embrace the public. Check out Marriner Eccles’s regular Friday press conferences or his NBC radio speech in 1935 promoting reform of the Fed. Moreover, The Washington Post’s Zachary Goldfarb suggests that more credit might be due to Bernanke’s chief of staff than to Bernanke and colleagues.
Still, Bernanke’s push for greater Fed openness is all the more remarkable because it entailed a transformation in Bernanke’s views about central bank transparency. Bernanke has long championed more clear and open communication by the Fed about its economic objectives, outlook and policy plans to make monetary policy more effective (by shaping expectations of the FOMC’s future actions). But the Fed’s public trouncing (“End the Fed,” “Audit the Fed,” for starters) seem to have convinced Bernanke that transparency also has important political benefits:
“When I came to the Fed I was very interested in increasing the transparency of the Fed. Although my motivations were primarily for making monetary policy more predictable and more accountable. But as it turned out, transparency was very helpful in other dimensions as well. In particular, you know, I tried where I could to bring the story, not just to markets and to other economists, but to a more Main Street type of audience, you know, on television or in town halls and things of that sort.”
Second, the Bernanke Fed will be remembered for its dwindling political autonomy in light of a more assertive Congress. Bernanke’s predecessor was heralded as “Maestro” and lionized by many as part of the Committee to Save the World. No such luck for Bernanke. Indeed,in his last press conference as Fed chair, Bernanke was asked what advice he would offer Janet Yellen, the incoming chair, for dealing with Congress. Bernanke kept it simple: “Congress is our boss.” Of course, Congress has always been the “the boss” given its power to revamp the mandate and powers of the Fed. But Congressional attention to the Fed tends to be counter-cyclical and reform of the Fed rare. Not so this time: Congress in Dodd-Frank simultaneously expanded the mission of the Fed and clipped its wings — reinforcing the Fed’s political dependence on Congress. Legislative stalemate might limit the likelihood of more reform in the short term, but the Fed seems keenly aware of the political pressures it will face when it begins to tighten monetary policy.
I hope Bernanke is feted with a good cake today when he presides over his last FOMC meeting. (Surely there will be punch.) The economic challenges that he leaves on the table for Janet Yellen will be steep. But the political challenges Bernanke leaves behind may be just as important in shaping the Yellen Fed and its success in restoring the Fed’s institutional credibility in the wake of historic crisis.