There is growing awareness that political considerations play an important part in determining the Federal Reserve's monetary policy and regulatory actions. As a result, economists and political scientists are becoming increasingly interested in the Fed's political role. This chapter is concerned with how the Federal Reserve uses its regulatory functions, its role as lender of last resort, and other means to amass political power. It is argued that when these sources of political strength interact with the tremendous influence derived from being the agency of monetary policy, the Federal Reserve emerges as a formidable source of political power within the U.S. government. The Federal Reserve's position concerning expanded powers for banks is an example of how it works to increase its political power.

The Federal Reserve's political role

Studies of the Federal Reserve's political role are slowly accumulating, but the work is still at a rudimentary stage. Several chapters in this volume contribute to that literature, and they provide references to earlier studies. Some studies have attempted to show that the Federal Reserve's independence of Congress or the president is more apparent than real. For example, Kane, in this volume and elsewhere (Kane 1980, 1982), argues that Congress makes the Fed appear more independent than it really is by using the central bank as a scapegoat or whipping boy: Congress engages in “Fed-bashing” when it is politically desirable to do so. Other studies have documented instances in which the Federal Reserve's monetary policies were influenced by presidents or powerful members of Congress. Still others have pointed to principal-agent considerations to explain why the Fed at times can act independently of Congress.