Association for Public Policy Analysis & Management

The 2016 presidential race has seen aspiring candidates of both parties take aim at the Federal Reserve System. In particular, the unusual setup of having private financial interests govern the operations—and, perhaps most significantly, appoint the presidents—of the twelve regional Reserve Banks has been called into question. As Bernie Sanders recently opined in the New York Times, “We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.”

Despite growing public attention to the Fed’s governance, very little work in Political Science has examined the regional Reserve Banks and the boards of directors that oversee them. This paper addresses this lacuna with an original dataset describing the personal and professional biographies, political memberships, and political contributions of individuals who served as Reserve Bank directors between 1975 and 2015. I utilize this new data to make two contributions to the literature on the Federal Reserve and the processes by which it makes and implements monetary and regulatory policies. First, I provide the first comprehensive mapping of Reserve Bank directors’ political activity. The descriptive statistics show that a vast majority of directors over this period are regular contributors to political campaigns and are most likely to affiliate with the Republican Party. I also find significant heterogeneity in the political activity of directors across Reserve districts.

Second, consistent with theories of bureaucratic delegation that predict the appointment of ideologically proximate agents, I find that the representation of interests on the Reserve Bank boards of directors predicts the monetary ideology of the Reserve Bank president appointed by the board. Boards that include a union representative are more likely to appoint more “dovish” Reserve Bank presidents, while boards with a greater number of directors from community banking backgrounds appoint more “hawkish” presidents.

The results suggest that understanding the voting behavior of Reserve Bank presidents in the Federal Open Market Committee, as well as the efficacy of Reserve Banks in regulating local financial institutions, requires a closer look at the private individuals who govern the regional Banks. Where the existing literature on the Federal Reserve has focused almost exclusively on the politically appointed Board of Governors, more attention should be paid to the significant role played by directors—the vast majority of whom represent financial and banking interests—in shaping monetary and regulatory policy outcomes. More broadly, this paper is relevant to scholarship that considers the means by which business interests may participate and make their voices heard in the policymaking process. In this case, financial interests may use their formal participation in the selection of key public policymakers (Reserve Bank presidents) and their governing authority over a significant regulatory institution to exert its influence on policymaking.