While economic experts generally regard the US Federal Reserve (Fed) as politically independent, little is known about public perceptions of the Fed’s political stance. These public perceptions are important because they could influence views on credibility of the Fed in achieving its dual mandate, and consequently shape inflation expectations. Significant misperceptions could arise due to, for instance, limited public understanding of its institutional framework and media coverage of political pressures or criticisms on the Fed. 

This new work addresses that gap through a novel survey experiment with over 5,000 politically representative respondents that shows how perceived political bias of the Fed   shapes their macroeconomic expectations and trust in the Fed. The survey asks participants to indicate their perceived political leaning of the Fed, which allows the authors to identify respondents who view the Fed as aligned with their political affiliation (in-group) or opposed (out-group). They find the following:

  • Most Democrat-leaning participants (66%) believe the Fed favors Republicans, while most Republican-leaning participants (60%) see it as favoring Democrats. Overall, 63% of the participants see the Fed as an out-group, whereas 37% as an in-group.
  • On average, those who perceive the Fed as an in-group have a more positive view of current macroeconomic conditions, expecting lower inflation, unemployment, and interest rate hikes over the next 12 months, as well as a lower inflation target. 
  • The average difference in inflation expectations between those who view the Fed as an in-group versus an out-group is large. This expectation gap is even more pronounced among individuals with strong in-group favoritism and exceeds the partisan gap in inflation expectations between strong Democrats and strong Republicans.
  • Participants who view the Fed as an in-group report moderately high levels of trust in the Fed, while those who see it as an out-group exhibit significantly lower trust. 

The authors then examine how consumers’ intergroup preferences regarding the Fed influence their inflation expectations. Do consumers who view the Fed as part of their in-group versus out-group differ in their willingness to pay: the maximum amount a person is willing to spend for a good or service for, and likelihood of receiving, Fed communications? Do these two consumer groups place different weights to Fed communications when updating their inflation expectations? To study these questions, the authors randomly assign participants to a control or treatment group, with the treatment group receiving a budget allowing them to adjust the likelihood of receiving news from the Fed versus left- or right-leaning media outlets. This allows the authors to measure participants’ willingness to pay for information. Furthermore, the experiment allows the authors to examine how these two consumer groups update their inflation expectations following Fed communication. They find the following:

  • Participants who perceive the Fed as an in-group are more inclined to spend money to increase the probability of receiving communication from the Fed and are more likely to receive it. These effects are amplified among individuals with strong in-group favoritism.
  • Participants who view the Fed as an in-group are more responsive to communication from the Fed in updating their inflation expectations than those who view the Fed as an out-group. 

Finally, and importantly, what is the potential impact of the 2024 US presidential election on participants’ perceptions of the Fed? To address this question, the authors examine participants’ views in a hypothetical scenario where Donald Trump is elected president, and the survey reveals the following:

  • Eighty-four percent of consumers would perceive the Fed as aligned with the Republican Party. 
  • While the overall proportion of consumers viewing the Fed as an in-group would remain stable, its composition would shift: Democrat-leaning consumers would view the Fed less as an in-group, while more Republican-leaning consumers would see it as one. 
  • Likewise, overall public trust in the Fed would remain steady, but trust among Democrat-leaning consumers would decline significantly, whereas it would rise among Republican-leaning consumers.

Bottom line: People’s perceptions of the political stance of the Fed, together with their intergroup preferences, play a crucial role in shaping their macroeconomic expectations, their trust in the Fed, and how they acquire and process economic information. The implications for monetary policy are clear: Consumers perceived political bias of the Fed is a crucial factor in shaping the credibility of monetary policymakers and influencing macroeconomic expectations, which, in turn, affects the effectiveness of both monetary policy and its communication. Finally, political events like presidential elections can significantly shift how consumers perceive and trust the Fed. Exploring effective communication strategies to reduce the number of consumers who perceive the Fed as an out-group is called for.