Who does the Fed work for?

Matthew Yglesias:
As you read about Kansas City Fed President Thomas Hoenig’s plan to increase the unemployment rate by pushing inflation even further down below target, it’s worth asking yourself “How does a person get to be President of the Kansas City Fed?” Well, you get picked by the Board of Directors. And who picks the Board? Local bankers, mostly:

Each Federal Reserve Bank has a nine-member board of directors: The member banks elect the three Class A and three Class B directors, and the Board of Governors appoints the three directors in Class C. Directors are chosen without discrimination as to race, creed, color, or national origin. The directors in each class serve staggered three-year terms.

Class A directors of each Reserve Bank represent the stockholding member banks of the Federal Reserve District. Class B and Class C directors represent the public and are chosen with due, but not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and consumers; Class B and Class C directors may not be officers, directors, or employees of any bank. In addition, Class C directors may not be stockholders of any bank. The Board of Governors annually designates one Class C director at each District Bank as chair of the board of directors and another Class C director as deputy chair.

This system has never made any real sense. The Fed’s Open Market Committee is an important maker of public policy. There’s no reason private firms should have such a large role in its governance. But many aspects of Fed governance have escaped scrutiny in recent decades thanks to the perception that the Volcker, Greenspan, and Bernanke era Feds were doing a good job. Increasingly, however, it’s clear that the Fed is not doing a good job—it seems incapable of hitting its inflation target, for example— which should spark increased discussion of the matter.