The Fed's (Possible) Political Makeover

Over the past four decades, the U.S. Federal Reserve has steadily gained power and independence in its policymaking. Each of its last four board chairs — Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen — has enjoyed considerable freedom to make his or her mark on the U.S. economy, for better or for worse. Volcker's campaign to bring the U.S. inflation rate down during the early 1980s facilitated two recessions. Greenspan spent nearly two decades as Fed chairman during the period that came to be known as the "Great Moderation," which continued until the 2007-08 financial crisis brought it crashing to a halt. Then Bernanke picked up the pieces in the wake of the crisis, instituting the controversial quantitative easing policies that have characterized much of the past eight years. In the process, the Fed transcended its traditional role to maximize employment and stabilize prices and took on what Yellen has dubbed the "unwritten third mandate": promoting financial stability and limiting systemic risk to the U.S. economy through regulation and supervision.

But the Fed's days of independence in policymaking may be numbered. On the campaign trail, U.S. President Donald Trump wasn't shy about criticizing the Fed's activities, and he, along with Republican lawmakers in Congress, likely intends to curtail the central bank's authority. The next year will present him ample opportunities to overhaul the Fed as he sees fit. Yellen, who will testify before Congress on Feb. 14-15 for the first time since Trump's inauguration, is now in the last year of her term as Fed chair. And by the time the president names her replacement, he may already have made four or five appointments to the Fed's board of governors.