Central Bank Autonomy

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Why is the Federal Reserve System so powerful and autonomous? The autonomy of the central bank in the United States is the joint product of strategic choices made by decision makers in the Fed and choices made by members of Congress. Fed decision makers update administrative procedure in ways that frustrate representative control of monetary policy. Members of Congress tolerate experimentation with procedures and rules because Fed independence creates an obstacle for presidents interested in controlling macroeconomic outcomes for electoral or partisan gain. Central bank autonomy is not a serious threat for members of Congress, as they independently develop a number of federal credit programs to counteract the consequences of monetary policy choices for particular sectors of the economy (notably, home construction and small business enterprise).The transformation of the Federal Reserve System reveals how gradual and incremental institutional changes can affect the strategies of political actors and policy outcomes. This finding challenges the dominant description of institutional change that has informed applied work on political institutions in both international relations and American politics. Conventional descriptions emphasize long periods of institutional stability punctuated by short periods of rapid change. Institutional change at the Fed is a gradual and continuous process. Incremental changes in monetary policy institutions (reserve requirements, open market rules, selective credit regulations) reveal the rich variety of strategic options for bureaucrats who desire autonomy from elected officials and the real effects of changing policy institutions on macroeconomic andcapital market outcomes.