The Fed Has Gone Adrift—It’s Time to End The Bureaucratic Mission Creep

The Federal Reserve is at risk of becoming an institution without a mission—or rather, with too many. In recent years, the Fed has strayed far from its core statutory mandate of price stability and maximum employment. The most visible symptom of this drift is the explosion of academic research and public advocacy on issues well outside the Fed’s monetary policy and financial regulatory domain—climate change, racial equity, and gender gaps to name a few. The underlying problem is institutional: a loss of focus, accountability, and restraint. By inviting or yielding to politics, the Fed invites undue scrutiny that could jeopardize its independence in monetary policy decisions. Independence is essential to maintaining monetary policy that keeps inflation low. Inflation often hurts those below the medium income who experience greater increases in prices than those who are more affluent.

Nowhere is this drift more evident than in the Fed’s growing funding and sponsorship of academic research unrelated to monetary policy or financial supervision. While universities and think tanks are proper homes for such inquiry, the Fed—an unelected institution with a narrow mission and powerful tools—should not be in the business of shaping the national conversation on inherently political issues. Its forays into climate modeling, environmental stress testing, and racial wage gap studies have politicized what was once the most technocratic institution in American governance. Some regional Fed Bank Presidents weigh in on politically sensitive issues entirely unrelated to monetary policy or financial regulation. For instance, Neel Kashkari in 2021 who controversially lobbied for a Minnesota state constitutional amendment on education, making calls to politicians and testifying before a state legislative committee.

At the same time, the institution’s own operating budgets have expanded enormously. From 2004 to 2023, the Board of Governors' operating expenses quadrupled in nominal terms, reaching nearly $1 billion annually—representing a 2.5-fold increase even after adjusting for inflation. Some of this is due to new bank regulation activities created through the Dodd-Frank Act. But much of this dramatic expansion, occurring largely outside the appropriations process, has enabled an entire research and administrative bureaucracy to grow unchecked, often operating with minimal external oversight. For instance, the Inspector General for the Federal Reserve Board and the Consumer Financial Protection Bureau (CFPB) is appointed by the Fed Chair, not by the President, and not confirmed by the Senate. Most federal IGs are appointed by the President and confirmed by the Senate and are accountable to both Congress and the agency they oversee. 

As the number of economists employed by the Fed has grown (the Federal Reserve Board alone employs more than 400 PhD economists today, which the Fed tries to match salaries to those of finance professors which have been increasing), there’s an important public policy question: how many economists are needed to run the Federal Reserve? How many of these 400 economists are actually important for the functioning of monetary policy and financial regulatory policy? How much of a subsidy to research should the Federal Reserve provide? These are open questions where lawmakers should weigh in.