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The President, the Fed, and the Financial Crisis


  • AUTHOR'S NOTE: Much thanks for perceptive comments from Robert Lieberman, Desmond King, Gary Gerstle, Larry Jacobs, Nigel Bowles, George Edwards, and Lorraine McDonnell; and for research assistance from Citlalli Ochoa.


The active role of the Federal Reserve (Fed) in responding to the financial crisis has provoked questions not only about its policies' economic wisdom but also about the political significance of the Fed's exercise of expanded power. This article places the Fed's actions into perspective, framing three counterfactuals that yield different vantage points on the key question: Have the Fed's actions in the financial crisis and beyond amounted to a “power play” intended to marginalize elected authorities in the management of the national economy? I begin with an overview of the relationship over the postwar period between the Fed and the presidency, and then employ this historical baseline in analyzing three key episodes: the response to the crisis as it emerged during the final years of the Bush administration, the surprising decision by the Obama administration to continue the policy trajectory set by the actions of the Fed and his Republican predecessor, and the stabilization policies implemented by the Fed since the onset of the financial crisis. I find no strong evidence that the Fed's actions exceeded the rubric expected on the basis of its evolving responsibility to meet emergencies in a financial marketplace where the pace of innovation is high and in the context of political party polarization that has stalemated fiscal policy.