Federal Reserve Board Chair, Dr. Janet Yellen, offered largely predictable testimony during last week’s hearings before the Senate Banking and House Financial Services Committees. Deviations from predictions have a way of standing out. Addressing a question from Banking Committee Chair, Sen. Richard Shelby (R-Ala.), Dr. Yellen may have left the door open to bi-partisan proposals that would reform how the Federal Open Markets Committee (FOMC) votes on monetary policy, and do so in a manner that could more consistently promote broad economic opportunity over narrow distributional interests.

The senator asked Dr. Yellen about a recent proposal from Richard Fisher, Dallas Fed’s president and a Democrat, to broaden the representation of district banks on the FOMC. Rep.Kevin BradyKevin Patrick BradyRepublicans' rendezvous with reality — their plan is to cut Social Security The Social Security 2100 Act is critical for millennials and small business owners House panel releases documents of presidential tax return request before Trump MORE (R-Texas) has long championed a related proposal. Relative to her pointed concerns about a Congressional push to audit the Fed, Dr. Yellen offered a more measured assessment of the bi-partisan idea to let more district bank presidents vote in each FOMC meeting, and vote more frequently across meetings.


Almost six years after the Great Recession, monetary policy continues to maintain an exceptionally accommodative stance. The length and depth of this accommodation has, in turn, raised concerns about the potential for asset bubbles, as well as the Fed’s ability to return to a more normal policy rate without creating undue market volatility. Congress has offered a number of proposals to address such concerns, with Sen. Rand PaulRandal (Rand) Howard PaulGraham promises ObamaCare repeal if Trump, Republicans win in 2020 Conservatives buck Trump over worries of 'socialist' drug pricing Rand Paul to 'limit' August activities due to health MORE’s (R-Ky.) call to “audit the Fed” being a prominent example.

Increased Congressional oversight may be fundamentally limited, however, and also compromise monetary policy if pushed too far. By its nature, oversight requires a look back at what happened, and thus relies on information that is second-hand and otherwise removed from those who make decisions in real time. And while informational constraints may lower the ceiling on how much good oversight can do, politics can increase how much bad it can do. Importantly, whether oversight favors narrow interests over broad opportunity can vary with the political preferences and capabilities of those who control the oversight mechanism.

Better aligning the incentives of monetary policy-makers with productive policy objectives could establish a stronger first line of defense against monetary mischief. Proposals like those of Fisher and Brady might do just that.

District bank presidents are nominated by boards of directors who, in turn, are elected in large part by member banks operating in their respective districts. To the extent that these commercial banks earn revenue from fixed rate loans, they are naturally concerned about inflation threatening their solvency. District presidents may thus embody an especially strong duty to serve the Fed’s most basic statutory goal—that is, price stability.

More than just a story, this firmly grounded hypothesis enjoys support in the academic literature. FOMC voting records during numerous executive administrations and Congresses reveal a significantly stronger tendency for district bank presidents, relative to Federal Reserve Board governors, to guard against inflation.

Bi-partisan proposals to give district presidents a stronger voice in monetary policy deliberations may be more than academic. Addressing Sen. Shelby’s question about such proposals last week, Dr. Yellen observed that the FOMC’s voting structure is “of course, something that Congress could, if it wished, revisit.” Members of Congress interested in effective reforms to the Fed could stand on firm economic ground in doing just that.

Falaschetti, PhD, MBA, CPA, is the director of outreach for financial and economic policy with the Mercatus Center at George Mason University, and previously served as a White House economic adviser. Reese is the assistant director of outreach for financial policy at the Mercatus Center.