President's Message: When Politics Makes No Bedfellows

In less than six months, American voters will go to the polls to decide who their new president will be. The looming national election raises the question of what role politics plays at the Fed. Some maintain that Federal Reserve monetary policy decisions are political in nature. This charge, in my mind, is a myth.

When critics claim that monetary policy decisions are political, they are suggesting that Fed decisions are intended to strengthen the position of one political party or another or to favor one group of people over another. I'm convinced that neither of these points has merit.

The Fed's overarching goal is to achieve low and stable inflation. This goal plays no favorites: The benefits of price stability and high employment are shared by all segments of society. Some, however, may argue that, while the Fed's primary goal is in fact impartial, the timing of its actions is not. Could the Fed adjust the timing of its policy actions in the short run to favor one political party or another? In principle, the answer is yes, but in practice the protections built into the Fed's structure make the risk remote.

For starters, the backgrounds of Fed policy-makers are varied enough to avoid any predominant political outlook. Members of the Board of Governors are appointed by the president. Given that a governor's term of office is 14 years, at any given time, some governors are typically appointed by a president from one political party and some by a president from the other political party. There's also no consistent pattern in the political affiliation of the governors appointed by any particular president. President Carter, for example, initially appointed Paul Volcker as Board chairman, but President Reagan reappointed him. And President Reagan initially appointed Alan Greenspan as chairman, but President Clinton has twice reappointed him.

Among the Reserve Bank presidents, party affiliation is pretty obvious for some—like me—who may have served in a previous position in a particular political administration. I'm not at all sure, however, of the political affiliation of most of my fellow presidents. If you read their speeches, I doubt that you'll find it obvious, either. Members of our boards of directors are also of varied political persuasion. Here again, I really don't know what the political leanings of the board members are. Of course, I can make some guesses, but the issue doesn't really come up.

Finally, the Federal Reserve has elaborate provisions in place to prevent political activity by Reserve Bank officers and directors. Fed officials and directors are not allowed to be involved in political campaigns, to engage in candidate fundraising or to take part in overt political activities of any kind. Fed officials also may not serve as advisers—official or unofficial—to political candidates.

So who should you vote for this fall to make sure the economy stays on course? The decision is yours. We're staying out of it.