Political Pressure and Central Banking

Jingoo Kwon, Joint Program in Financial Economics PhD Student
William Cassidy, Assistant Professor of Finance, Washington University in St. Louis

This project studies the existence and effect of political pressure on the Federal Reserve’s decisions from Congress. Our (Cassidy and Kwon) aim is to analyze empirically whether political pressure exerted through Congress affects the credibility of monetary policy and market expectations of future FOMC decisions. Congressional decisions are important for Federal Reserve officials because Congress has the power to amend the Federal Reserve Act. Such amendments can both circumscribe the Fed’s powers as well as alter the Fed’s objectives. Further, we plan to study the endogeneity of this political pressure by linking political variables to the speech of Congresspeople themselves. We also plan to study how this pressure varies across the business cycle and over time and the aggregate effects of this variation on inflation, output, and asset prices.

Our core innovation is to construct a new dataset of Congresspeople and FOMC members by analyzing an archived database of Congressional documents through ProQuest Congressional, not previously used in the economics or finance literature. To the best of our knowledge, the database is the only comprehensive collection of transcripts of hearings. It includes documents not listed on the Fed’s own digital archive (FRASER)1, and for documents listed on this archive, much richer information about the speech of both committee members and FOMC members.2 Anecdotal evidence from Bernanke (2022) suggests that these hearings are important venues in which information is released and that markets, in turn, react to the content of these hearings