The Federal Reserve of the United States (the Fed) was established in 1913 by the Federal Reserve Act with the aim of stabilizing prices and promoting maximum employment through monetary policy. This act was passed in hopes of reducing the frequency of financial panics following the Panic of 1873, the Panic of 1893, and the Panic of 1907. The Fed was established with 12 regional banks to disperse financial power and reflect regional economic conditions in monetary policy. While the Fed was not designed to be directly democratically accountable, it was intended to be representative. The Federal Open Market Committee(FOMC) is composed of 7 governors, the Regional Fed president of New York City, and a rotation of four other regional presidents. In theory, this system would permit each region to have a voice in monetary policy, but recently, this has failed in practice.
This representative system has eroded as regional presidents are chosen through hiring pipelines that prioritize financial expertise, particularly in New York City. This mechanism underweights regional knowledge and causes a disproportionate representation for the New York Fed. Currently, the Cleveland Fed, the St. Louis Fed, the Minneapolis Fed, and, arguably, other regional banks are chaired by presidents with no personal or institutional ties to the regions they preside over. These regions are uniquely concerned with agriculture, deindustrialization, employment durability, and low long-term labor force participation, which are complex issues that could require regional knowledge. While the merits of the regional presidents do not stand in question, the increasing homogeneity of experience and geographical backgrounds in Fed leadership impedes the Fed’s ability to aptly represent and engage with each region’s concerns. If the Fed were a more diverse institution, it would be better equipped to handle the heterogeneous economic conditions the current regions face.
While monetary policy is applied uniformly across states, state economies vary significantly. Because economic conditions vary from state to state, so do the effects of monetary policy. Underrepresentation at the Fed, therefore, can lead to monetary policy that is incompatible with state-level economic conditions, resulting in disproportionate impacts.
While the merits of the regional presidents do not stand in question, the increasing homogeneity of experience and geographical backgrounds in Fed leadership impedes the Fed’s ability to aptly represent and engage with each region’s concerns.
Opponents of instituting regional residency requirements often argue that Federal Reserve Presidents should be elected solely on merit and should not be subject to geographic representation. As is evident among other regional presidents, however, expertise need not come only from major financial institutions on the coasts but can also come from academia, government service, or regional banking. Furthermore, regional Fed presidents who lack regional ties may default to the financial frameworks taught by institutions in New York, effectively representing the economic interests of other regions, rather than the one to which they have been elected. While the Federal Reserve Bank of New York deserves greater influence as it conducts federal open market operations, it already receives this through its permanent seat on the FOMC. As monetary policy is applied evenly across states, this skew toward financial markets risks disproportionately benefiting some regions, while harming others.
Currently, Congress faces extreme polarization, and a structural amendment to the Federal Reserve Act would require bipartisan support. Fortunately, there is precedent for bipartisan support for amendments to the Federal Reserve Act.
In order to amend the underrepresentation of certain regions in the Federal Reserve, Congress would have to amend the Federal Reserve Act, or the Fed would have to internally opt to only elect people who have a regional background. While the latter is unlikely, Congress has amended the Federal Reserve Act countless times, most notably in the 1933 Banking Act and the Dodd-Frank Act in 2010. Given this precedent, Congress could reestablish the Federal Reserve’s representative intent by altering eligibility rules or selection criteria for regional bank presidents.
Currently, Congress faces extreme polarization, and a structural amendment to the Federal Reserve Act would require bipartisan support. Fortunately, there is precedent for bipartisan support for amendments to the Federal Reserve Act. As recently as 2022, Senators Elizabeth Warren and Pat Toomey introduced the Financial Regulators Transparency Act of 2022 to increase transparency and oversight of the Fed. This bill was introduced, but never brought to a vote, and died when the 117th Congress ended. In 2023, this bill was reintroduced in a bipartisan effort by Elizabeth Warren and Thom Tillis, but it was also stalled in committee. While this bill was never signed into law, the Fed adopted a new policy to enhance transparency and accountability for Fed officials. The Financial Regulators Transparency Act is evidence that an amendment implementing regional residency requirements could receive bipartisan support, and that even if it were unsuccessful, it could still alter the Fed’s structure. The Federal Reserve was established to be geographically representative, and a sustained effort from Congress is feasible and would restore the representative character its founders intended.
Ander Pineda ‘28 studies in the College of Arts & Sciences. He can be reached at a.i.pineda@wustl.edu.