The Federal Reserve Bank of New York has endured an uncomfortable amount of public scrutiny of late. New York Fed President William Dudley, for example, recently appeared before a less than amicable Senate Banking Committee. One member of that committee, Sen. Jack Reed, D-R.I., would like to require that any future New York Fed presidents appear before the committee as a prerequisite of the job. Reed introduced a bill that would require Dudley's successor to be presidentially nominated and Senate confirmed. The bill aims to replace existing, indirect political accountability with direct political accountability, but it’s not entirely clear what that would solve.
To understand the origins of the indirect political accountability, Carnegie Mellon political economy professor Allen Meltzer pointed out in a 2011 paper that the Federal Reserve Act emerged following the “panic of 1907” as a compromise between bankers and populist interests. Designed to placate both bankers who liked the idea of having a Bank of England-type “banker’s” bank, and populist interests that did not, President Woodrow Wilson suggested that Board of Governors’ oversight would produce accountability. Reserve banks are governed by boards comprising three directors who are appointed by local banks and six directors who represent the public. Traditionally, reserve bank boards of directors, rather than the president of the United States, have selected their own presidents. Selections are subject to the approval of the Federal Reserve System’s Board of Governors. So indirect political accountability begins with appointments, but that’s not all.