The Republican takeover of the U.S. Senate has interesting implications for the Federal Reserve. Three issues come to mind: the legislative agenda, appointments, and hearings. But predicting Republican posture in the 114th Congress is a very difficult thing: it will depend entirely on which wing of the party—the populist/Tea Party wing, or the bank-friendly/establishment wing–takes control of the caucus. If the Tea Party Republicans are either ascendant or given free rein over this issue, then things will get very interesting. If they are not—and I expect they will not—then there is likely to be very little change on any of the three issues.
First, the legislative agenda. The most important bill to watch is the Federal Reserve Accountability and Transparency Act of 2014 . This controversial bill would change both the functions and structure of monetary policy. Functionally, it would mandate the so-called Taylor Rule, a feedback rule by Stanford economist John B. Taylor in 1993 (based on data from 1987-1992) that relates the federal funds rate to a set of other variables (including the target inflation rate, the real interest rate, and gaps between target inflation and observed inflation and target and observed economic growth).
Structurally, the bill would put the U.S. Government Accountability Office and the relevant committees of Congress to oversee any deviation from the Taylor Rule. In fact, the GAO—not the Fed—would be in the business of determining whether the Fed deviated from the Taylor Rule, in the first place.
The virtues of monetary policy by rule or monetary policy by central banker discretion is a controversial one among economists; I don’t have much insight into that debate. (Although as a historian, I’m skeptical that a rule based on such a narrow window would be appropriate for monetary policy in all situations, especially when we are facing truly unusual situations, such as a liquidity trap.)
But the structural changes–principally putting the GAO into the monetary policy business–are of dubious value. As I argue in my forthcoming book, Ulysses and the Chaperone: The Independence, Accountability, and Governance of the Federal Reserve, the real problem with the bill and others like it is the insertion of more organizational complexity into one of the most organizationally complex institutions in the federal government. Even if one endorses monetary policy rules over central bank discretion, there are real reasons why we should be skeptical of placing the GAO at the center of that policy.
Does the election mean that we should expect to see the Act on the House floor, or in the Senate? It’s unclear. Most enthusiasm for this kind of Fed reform comes from a more conservative wing of the Republican Party. The Wall Street wing is historically a very supportive constituency of the Fed and its current structure, and it seems that the Republicans’ success stems from a partial attempt to move to the business center of their base. Given that President Obama would surely veto the bill, I am skeptical the Republicans in either the House or the Senate would divide their caucus with something unlikely to see the light of day. But it is the legislative issue to watch.
The second issue deals with appointments to the Fed’s Board of Governors. The Board has two vacancies, but President has been in no rush to fill them. Indeed, President Obama has had the highest vacancy rate on the Board in its history, even when he had a Democratic Senate. To be sure, part of the problem was with the Senate Republicans. In what must surely be the most baseless rejection of a candidate in the Fed’s history, Republicans blocked MIT economist Peter Diamond from the Board in 2011 (the public justification was that Diamond wasn’t qualified). Diamond went on to win the Nobel Prize while his nomination was pending, but that apparently wasn’t enough, and Republicans blocked the appointment. This regrettable political play demonstrates some limits to the President’s appointments. But they aren’t the whole story: Diamond’s appointment went off the rails before filibuster reform. After it, the President still has not put nominees forward.
It’s always difficult to predict the way the political winds will blow, but my hunch is that the President won’t suddenly see the light during the next two years. Even if he wanted to make the Fed’s appointments a priority, he might worry (appropriately) that filling the Fed with Governors suitable to Republicans could undermine his own goals and the leadership of his appointed Chair, Janet Yellen. (Chang’s book on Fed appointments makes clear how much the President and Senate interact ahead of the formal appointment process.)
Again, it isn’t at all clear where in the Republican caucus the appointment preferences will arise. If they come from Senator Rand Paul and other hawks in the Senate, who favor greater attention to anti-inflationary monetary policy, then we might expect to see the very rare instance of Governors dissenting from decisions on the Federal Open Market Committee. (These dissents do occur, but they are almost always from the presidents of the Federal Reserve Banks.) You can see why I have doubts that the President will try his hand at navigating this political thicket and simply leave these vacancies unfilled.
Finally, on the hearings front, it will depend entirely on who sits in the big chair at the Senate Banking Committee, the Senate committee that conducts congressional oversight over the Fed. Senator Mike Crapo (R-Idaho) is the current ranking member on the committee, and while he has co-sponsored one of the “audit the Fed” bills in the past, he has not taken the lead in Fed reform efforts normally associated with the Tea Party wing of the party.
The politics of monetary policy have always been complicated. It’s a canard that Republicans are monetary hawks, Democrats monetary doves. The reality is that the Republican caucus is a divided one. Where the Senate’s new leaders will come down on legislation, appointments, and oversight will depend entirely on the internal struggles that will influence much of the rest of the experience of the Republican Senate.