The Federal Reserve is, unfortunately, a target for conspiracy theories, nonsense political opinions, and baseless attacks. Of the most common and seemingly legitimate there is the idea that the Fed is not audited and should be. Not only is the Federal Reserve audited by the strictest rules and guidelines in the world, but the results of its annual audit are freely available on its website.
Paranoid conspiracy theories about the Fed don’t sit solely on one side of a political spectrum. On the left is the theory that the Fed is constantly at work to destroy workers and their bargaining power, while on the right is the persistent theory that the Federal Reserve is actively working to distort and destroy free markets. These aren’t even fringe theories touted by crackpots; the left-wing argument linked here is written by a tenured professor at the University of Texas at Austin, while the right-wing argument here comes from the Libertarian Party itself.
“Left” and “right” are perhaps the wrong words to use here, and it may be more appropriate to say that those who want more centralized oversight of markets and those who want less both criticize the Fed for either doing too much, too little, or doing the wrong thing. And while this is often couched in being born from malice, sometimes the Fed’s critics argue that it is incompetence or poor incentives that are to blame. But despite the ideological opinion or value judgment put on the Fed’s workers’ motives, the end result is the same: an intensely negative opinion of the Fed and what it does.
As with many things, particularly in financial markets, it is much better to get to fundamental principles, ignore ideological and political bias as much as possible, and take a pragmatic look at incentives, structures, and relationships to see how the Fed does what it does and why.
To begin, we should first acknowledge that the Federal Reserve has no direct ownership; it is structured to be owned by its own constituent banks in the U.S. banking system, but those banks earn no profit from the Fed itself and the Fed’s profits, when it earns some, are directed to the Treasury Department. However, since these are entries in databases these days, the gains (and losses) are effectively immaterial; they change numbers on a balance sheet, but do not result in more power, more payouts for workers or owners, or anything resembling the benefits of winning or losing either on Wall Street or in Washington D.C. It is this lack of benefit from its activities that confuses the Fed’s critics the most, and may be a dominant source of the confused antagonism with which they greet the central bank.
Instead, the Federal Reserve has two main goals: to maintain stable prices and maximum employment. These are contradictory goals, and it is that contradiction which constantly motivates the Fed into finding a balance. On the one hand, it does not want too much employment, or else a wage-price spiral will result in inflation (i.e., the opposite of stable prices). At the same time, it does not want absolutely zero price growth, because that too often leads to a deflationary spiral, which would result in massive job losses. As a result it most constantly measure how much unemployment the economy should have with how much monetary supply and money velocity it should have. It is thus no surprise that the champions of labor hate the Fed for half of its mandate, while the champions of free markets hate the Fed for the other half of its mandate.
To achieve the balance of high employment and low (but still positive) inflation, the Federal Reserve employs many economists and thousands of people (the exact number is available on their website, again in audited detail). These people do not earn a lot of money by qualified employee standards (again the data is available online), and the Federal Reserve chair and board’s salaries are all determined by Congress (currently at $203,500).
Could those Fed workers be in it for the exit opportunities and potential power of knowing the inner workings of the largest central bank in the world? While that’s true, the pathway of Fed economist to Wall Street banker is not direct, and Wall Street does not typically poach the Fed’s workers for talent. Their knowledge, simply put, isn’t that valuable. The most famous economists at the Fed may start their own small, boutique research firms or find relatively low paying research jobs on Wall Street, but that’s about it.
The bigger motivation for a job in the Fed is the stability of the work (it’s much easier to get fired at a hedge fund, for instance), the benefits (government pensions are increasingly valuable in a period where the private sector has almost fully pivoted to defined contribution retirement plans), and in many cases the ability to affect change in the economy through effective research that changes policy decisions.
This gets to the core of what Fed economists do: throughout their tenures at the central bank, they spend a lot of time doing what academics typically do; namely, reading research, writing research, and attending conferences where research is presented, dissected, debated, and responded to. While academics tend to do research that is focused on projects guided by research grants or the research interests of departments or institutions, the Fed’s researchers are motivated specifically by the tasks of the central bank (food economists might do research on how regulations influence agricultural financing, or labor economists will undoubtedly research how different policies in the past have increased or decreased labor power).
A proper criticism of the Federal Reserve would be that its constituent workers have a bias towards one or another political viewpoint or ideological stance. And that would be a valid criticism, as no human on earth is without biases. But the real question is what biases do those workers have, how do they manifest themselves in their work, and are those over 20 thousand workers biased in one particular direction or another? And those are questions that are very hard to answer—which is why the appeal of easy, lazy conspiracy theories about the Fed endures.
