Today's the 100th anniversary of the legislation that established the Federal Reserve. It has surely expanded beyond its original intent. As President Obama's nominee for Fed Chair Janet Yellen prepares to take Ben Bernanke's place next year, it's important to reflect on just how powerful the Federal Reserve has become.
It might be the most powerful economic institution in the entire world.
As the Associated Press reports:
"If Woodrow Wilson and the other architects of the Federal Reserve could have known how powerful it would become, they would have been shocked," said Sung Won Sohn, an economics professor at California State University Channel Islands. "There is no part of the global economy today which is not affected by actions of the Federal Reserve."
Congress has sought to insulate the Fed from political meddling to preserve its independence. Yet the Fed has become a target for critics because of the unorthodox steps it's taken over the past five years. Some Republicans think it isn't accountable enough.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, plans to review whether changes should be made to the Fed's operations — especially, Hensarling argues, because "the Fed has either implicitly or explicitly assumed so many mandates and has, historically, been subject to little or no congressional oversight."
When Rep. Ron Paul was still in Congress, he was able to marshall enough support to pass "audit the Fed" legislation multiple times before it died in the Senate. Longtime critics of the Federal Reserve have accused the institution of playing to incumbent power - so Democrats thought Bernanke was a Republican tool during the Bush years, and Republicans have accused the central bank as being beholden to Democrats during Obama's presidency.
As John T. Woolley wrote in Monetary Politics: The Federal Reserve and the Politics of Monetary POlicy in 1986:
"There is a substantial consensus that presidents generally get the monetary policy they want from the Federal Reserve. Recent analyses by economists have stressed the conclusion that monetary policy is heavily influenced by pressure from the administration... the "president as superior" argument.
This is largely reflected in general opinion polls. The election of President Obama caused Republicans and Democrats to flip, almost like a mirror, on their approval ratings for Ben Bernanke:
The Fed at 100 years: the most powerful economic institution in the world and largely beholden to incumbent power. Janet Yellen is about to inherit an incredibly powerful role.