Does Federal Reserve Governance Need Reform?

To understand the Fed’s governance structure, it is essential to understand the Fed’s purpose. The Fed was created to provide “an elastic currency,” which meant that the supply of monetary assets would vary with the needs of the economy, a function performed imperfectly by clearinghouses prior to the founding of the Fed. The Fed was structured to improve upon the pre-Fed clearinghouse model by representing a broader array of public interests. The hybrid public-private aspects of the Fed’s governance were fundamental to that objective. The structure and governance of the Fed is still effective today because the considerations of the founders – providing for a diversity of perspectives on economic and financial conditions, and insulating monetary policy from political influence – remain relevant. There is evidence that the private aspects of Reserve Bank governance have served monetary policy well. Reserve Bank boards of directors are a key component of the Fed’s public-private governance structure, and potential conflicts of interests on these boards are well managed.