Notice & Comment

Unanimity and Disagreement at the Federal Reserve

It has been a very active couple of weeks for “Club Fed,” the group of scholars, investors, journalists and others who watch the Fed. In what may well be the Senate Democrats’ last Fed-related hurrah, we witnessed a fascinating hearing on the Fed’s supervisory authority, especially as delegated to the twelve quasi-private Federal Reserve Banks (law professor and central banking expert Robert Hockett’s testimony is particularly worth reading). Related to this, Senator Jack Reed (D-RI) introduced legislation making the president of the Federal Reserve Bank of New York a presidential appointment. And the Fed’s Board of Governors issued a statement suggesting that they would review—twice!—the nature of its supervisory functions throughout the System. These are big issues in the world of the Federal Reserve; I’ll have more to say about them in the days and weeks ahead.

For now, though, I want to flag a paper by Cass Sunstein about the Supreme Court. In “Unanimity and Disagreement on the Supreme Court,” we get an account of how the Court changed from one ruled by consensus to one ruled by individual personalities. It’s a very interesting story of non-legal institutional change with lasting impact on the way we make policy in our government and society.

The Court’s institutional changes are of course interesting in their own right, but they are also important as a comparative point to that other committee that exercises so much control over private lives—the Federal Open Market Committee. I have often wondered why these committees function so very differently: why does the Supreme Court vote by sometimes strident committee vote with dueling statements, whereas the Fed largely decides by consensus with at most one or two dissenting votes (incidentally, almost always coming from a Reserve Bank president, almost never from the presidential appointees on the Board of Governors)?

Simon Johnson and I wrote about this strange difference last year, something I expand on in my forthcoming book, Ulysses and the Punch Bowl: The Power and Structure of the Federal Reserve. The answer isn’t law. The Fed and the Supreme Court are constituted, legally, in very similar forms: they both consist of large committees that make decision by majority vote, with a Chair/Chief given largely ceremonial and administrative duties but not specific authority over new policy. And yet, the other eight justices exercise a level of policy autonomy that the other six members of the Fed’s Board of Governors and the other twelve members of the Federal Open Market Committee simply do not match.

Sunstein’s paper tells us the story of leadership and personality and making these changes. The Fed’s Chair-dominated committee structure is the product of very similar dynamics, largely the product of four chairmen. In Ulysses and the Punch Bowl, I discuss this history in detail, but I want to flag it by comparison to the Supreme Court to make two points. First, some of the most important institutional changes come by force of individual appointments and individual points of inflection in history. And second, perhaps most importantly, that change is constant. Institutional equilibria, I argue, are incredibly unstable, in relation to but independent from the legal changes that may alter a set of preexisting relationships. Viewing the practices of the Federal Reserve as cast in stone, whether statutory or customary, is inaccurate. The reality is much more contingent and much more interesting.

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