Abstract

The Federal Reserve has grown in interest to contemporary political observers, the general public, and political scientists in recent years as the Fed takes on an ever-growing and more prominent role in managing and responding to disasters facing the United States’ economy. Although speculation about political control of the federal reserve has existed since the organization’s inception, it is only in more recent years that a burgeoning political science literature has begun to grow considering the ways in which the Fed may be influenced by political actors and forces (see for e.g., Binder and Spindel 2017; Morris 2000), despite the Fed’s oft-proclaimed independence from political considerations and actors. We take up this question by investigating one way in which political considerations may influence the sorts of policy the Fed creates. In particular, we ask whether a critical tool used by the Fed to justify and generate its decisions about monetary policy – projections of the future economic performance of the U.S. economy – appear to be influenced by political considerations. Using Federal Reserve forecasts of future U.S. economic performance on a number of key indicators and the actual economic performance during the forecasted time period, we generate a measure of the extent of error in the Fed’s forecasts. Using this measure of error, we then investigate whether or not the Fed’s forecast error is systematically related to political factors, such as partisan control of the executive or legislative branches. We demonstrate that the Fed’s forecasts of future economic performance are systematically related to the partisan control of Congress, and further that the effects are asymmetric between parties. These findings have implications not only for those interested in better understanding the policymaking of the Federal Reserve or political control over policy outcomes, but also for those more broadly interested in the health of the United States’ economy and the behavior of one of the most influential institutions in shaping that economy’s health.