Who Influences the Fed? Presidential Versus Congressional Leadership

Abstract

This paper examines political influences over U.S monetary policy, analysed quarterly from 1953 to 2000. We use indicators of presidential and congressional ideology as predictors of actor preferences and as representative of overhead democracy. We also include several economic variables predicting percent change in the federal funds rate. While not surprised to find that economic conditions are important in explaining Fed decisionmaking, we also find that the theory of overhead democracy also contributes to the explanation. Initially, both presidential and congressional ideology are important but in a combined model, presidential variables wash out influence of congressional variables. Thus, we conclude that overhead democracy must be included in models predicting Fed decisionmaking.

Private Sector Influences on Monetary Policy in the United States

“…These authors find a strong correlation between monetary policy actions and signals from the executive branch during the Burns and early Volcker chairmanships, though the correlation is weak to non‐existent for other chairmanships. Saeki and Shull (2003) find that changes in the federal funds rate are correlated with signals from the executive branch but not Congress, while Caporale and Grier (2005) find that regime shifts in real interest rates coincide with shifts in ideology of the president and key members of Congress. Finally, Havrilesky (1990, 1993) finds that monetary policy actions are also correlated with signals from the banking industry as reflected in the policy recommendations of the Federal Advisory Council (FAC).…”

Economic Demagoguery: The Limited Effects of Presidential Rhetoric

“…The Federal Reserve pays attention to pressures from Congress, which often requires that members of the Board of Governors provide testimony before hearings and particular committees about the economy and future economic conditions (Saeki & Shull, 2003). More specifically, the preferences of the Senate play a significant role in the Fed's decision to adopt an expansionary or a restrictive monetary policy (Morris, 2000).…”

“…More specifically, the preferences of the Senate play a significant role in the Fed's decision to adopt an expansionary or a restrictive monetary policy (Morris, 2000). The senators are going to have specific preferences based upon the preferences of their constituents (Saeki & Shull, 2003).…”

“…37 Although, successfully doing so is more complicated because presidents have to rely on their ability to motivate other actors to make decisions that will affect monetary policy. 38 Some scholars argue that the Fed is more likely to make decisions about monetary policy based upon external pressures from Congress or economic indicators rather than pressure from the president (Saeki & Shull, 2003).…”

“…More specifically, the Fed is going to pay significant attention the Chairperson of the Senate Banking Committee when considering whether they will expand or contract monetary policy, given the power of this chairperson: autonomy, agenda-setting, and ability to call hearings, as well as the Chairperson's ability to withstand pressure to compromise on their ideological predilections, unlike the president who has a national constituency(Saeki & Shull, 2003). The Fed is more likely to make its decision about the economy based upon the preferences of the Senate Banking Committee Chairperson rather than the president(Saeki & Shull, 2003).44 There were six significant opportunities for the Congress to show the Fed and the president to whom the Fed should respond(1921, 1933, 1935, 1951, 1975, and 1994).45 The independent status and structure of the Fed was highly influenced by interest groups such as bankers(Jeong, Miller, & Sobel, 2008). The preferences of such interest groups can be seen in the roll call votes of the Senate during the Fed's creation and reform initiatives.…”