Congress made the Federal Reserve independent of the executive branch to keep presidents from manipulating interest rates to win elections. But the Fed is not independent of Congress regarding monetary policy or anything else. Congress has the authority—indeed a duty—to discipline a mismanaged Fed. While it will likely take presidential pressure to get Congress to act, Congress, not the president, should be demanding Fed accountability for protecting taxpayer interests. Recent Fed decisions have cost taxpayers hundreds-of-billions of dollars and yet the Fed’s mistakes have mostly been ignored by Congress and the mainstream press.
The Fed’s recent string of costly missteps largely escape public attention courtesy of the Fed’s adroit public relations, a fawning press, and a largely incurious Congress. Congress must fully investigate the Fed’s costly operational mistakes and make the reforms necessary to protect taxpayer interests.
While Louis XIV is revered as the king who built the Palace of Versailles, the current Federal Reserve Board will be remembered as the Board that bejeweled its headquarters. The Fed’s new marble and bronze “Versailles on the Potomac” cost an estimated $2.5 billion. It includes especially spacious offices, rooftop dinning and garden terraces, glass atriums, and underground parking—all to house about 2500 Board employees, many of whom routinely work from home. By comparison, J.P. Morgan’s new Manhattan skyscraper with “amenities galore” for 14,000 staff reportedly cost $3 billion. Unlike Versailles, security concerns will keep taxpayers from touring the Board’s new monument to Fed excess.
The 2008 financial crisis was partly attributable to the Fed’s improvident treatment of subprime mortgage risk and yet the Dodd-Frank Act rewarded the Fed’s lack of prescience with expansive new powers. Congress made the optimistic assumption that Fed staff could use these new powers to identify and mitigate risks that go undetected and uncontrolled by existing regulations. The Fed embraced this myth by creating a new “systemic risk” division and embarking on a hiring binge.
Between 2008 and 2024, large federal government agencies on average reduced staff by 9 percent while the Federal Reserve Board increased its staff by 17 percent. Not to be outdone, the 12 district Federal Reserve Banks expanded their headcount by 25 percent even though the number of member banks they supervise and the number of checks they clear have dropped precipitously.
The Fed’s hiring spree has been anything but cheap.
For its first 75 years, Fed staff was paid like regular government employees. Beginning in 1989 the Fed adopted a “market-sensitive” salary structure to mitigate turnover and address “low employee morale because of actual or perceived noncompetitive pay.”
The 2008 financial crisis must have set a new nadir for Federal Reserve Board staff morale. Between 2008 and 2020, the real inflation-adjusted salaries of Board staff increased by 80 percent, far outpacing the real income growth in the private sector. In 2023, the average Board salary was $271,372 excluding benefits and bonuses—the highest in all federal government. The salaries of professional Board staff and officers exceed those of equivalent or even senior positions at the U.S. Treasury, often by more than $100K.
Despite premium pay and new hires, the Fed misdiagnosed the inflation outlook following COVID and was blindsided by the failures of Silicon Valley, Signature and Republic Bank. To prevent a larger banking crisis, the Fed was forced to adopt an emergency lending program that subsidized discount window loans to banks with large unrealized interest rate losses similar to those that caused the Silicon Valley, Signature and Republic Bank failures.
The Fed’s failure to anticipate and control inflation has been especially costly for the Fed’s own operations. Since September 2023, the Fed has accumulated more than $225 billion in cash operating losses. The Fed borrows money to cover these losses, ultimately at taxpayer expense, and Fed losses are likely to continue accumulating for several more years. All told, the Fed’s inability to anticipate and control inflation may cost taxpayers more than a trillion dollars before the Fed regains profitability and resumes sending its profits to the Treasury.
Other recent operational decisions worth scrutinizing include the Fed’s decision to develop its own real time payments system, FedNow. It took more than a half-billion dollars to develop and launch FedNow in 2023 where it competes with RTP, a successful real time payment system developed by the banks themselves and operating since 2017. With other private sector near real time payments systems like Zelle, Venmo, and PayPal, and the promise of blockchain-based payments systems on the horizon, it is unclear whether the economic benefits of FedNow justify its hefty cost for taxpayers.
With a track record like this, you might think the current Fed would be facing uncomfortable questions from its own Inspector General and from Congress about Fed decisions that have resulted in massive taxpayer cost. The silence from the Fed’s IG is predictable. Unlike every other major federal agency that has an independent IG that answers to Congress, the Fed’s IG is employed at the pleasure of the Fed Chairman and earned a reported salary of $400K in 2023. Perhaps this arrangement helps to explain the IG’s apparent reluctance to probe and publicize Fed operational mistakes that have cost taxpayers billions.
People of good conscience can have honest concerns about the sagacity of several recent decisions taken by the Fed—decisions that have cost taxpayers hundreds of billions of dollars when historically the Fed typically remitted billions in profits to the U.S. Treasury each month. By statutory design, the Fed and its chairman answer to Congress. But without pressure from President Trump, Congress will likely continue to ignore Fed mismanagement that has resulted in a massive bill for taxpayers including for the Fed’s new “Versailles on the Potomac." Financial markets and the economy would be better served if the President channeled his concerns into a campaign to pressure Congress to reinvigorate its oversight of the Federal Reserve.
