Essays on Federal Reserve Bank Evolution,  Transparency and Market Interaction

Successfully Defended August 6, 2013

“Examining the Origin of Federal Reserve Independence” explores early Fed history with a particular emphasis on the period between 1947 and 1953 in order to provide a complete political account of Fed Independence. This account demonstrates that although the 1951 Accord played a large role in eventual Fed independence, it was only one in a series of political events that culminated in an independent Federal Reserve. Most notably, these events include the 1948 election of Senator Paul Douglas and the subsequent Douglas Hearings, the 1950 and 1951 instances of Treasury and White House press deception, the 1951 Fed-Treasury Accord and appointment of William McChesney Martin as Fed Chairman, the 1952 election of Dwight Eisenhower, and the beginning of the Eisenhower administration in 1953. Since the Korean War helped drive the election of President Eisenhower, the war also plays an important role in a political examination of Fed independence. 

“Centralization and Technocracy at the Federal Reserve” examines the centralization of Federal Reserve power at the Board in Washington DC and the origins of modern technocratic policymaking at the Fed. The archival evidence examined in this paper identifies the key origin of increasing Fed technocracy as an internal Fed program originating in 1963, but the data also indicate that this program arose out of existing internal pressure to advance the research and policymaking capabilities of the Federal Reserve. Evidence suggests that steps toward increasing Fed technocracy largely stalled in the 1970s due to new economic challenges, increased political pressure and weak institutional leadership. However, a leadership change in 1979 resulted in a new, dramatically more technocratic Federal Reserve that persisted through the 1980s into the 1990s and 2000s. The story of Fed centralization and technocracy presented here demonstrates the growth and change of a government bureaucracy, largely without statutory mandate. This paper concludes with comments about how the Federal Reserve utilized transparency measures to limit the political ramifications resulting from centralization and increased technocracy.

“How the Fed Moves Markets: Equity and Bond Market Reactions to Federal Reserve Communications” explores the financial market effects of increased Fed transparency. Specifically, this paper examines every speech, Congressional testimony, press release and FOMC minutes release made publicly available by the Federal Reserve Board to test whether Fed communications influence market behavior. The responses of Treasury bond markets and equity markets to these transparency measures are tested with particular emphasis on equity markets. Findings indicate that market volatility is little changed as a result of most of these Fed communications. This suggests that despite media hype, investors draw minimal useful information from most individual Fed communications and largely treat these communiques as noise or “cheap talk.” These findings provide insights on how bureaucracies utilize communication and transparency measures to control the flow of information about policymaking at their institution. These findings also lead to an alternative means of analyzing Fed communications involving quantitative analysis of the content of all Fed communications in concert, rather than qualitative analysis of individual communications. This alternative analysis identifies the broad signals provided by modern Fed transparency measures and clarifies how this quantitative approach to qualitative communications might be useful in gauging market response to current and future transparency measures.