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Stephen H. Axilrod (2011). Inside the Federal Reserve: Monetary Policy
and its Management, Martin through Greenspan to Bernanke (Cambridge
and London: The MIT Press), pp. 225, p/b, ISBN 978-0-262-52513-8
ABSTRACT: What does the US Federal Reserve look like from the inside? Stephen Axilrod,
who served as both Staff Director and Secretary of the Federal Reserve Open Market Committee
(FOMC), sets out to explain in this book what it was like to do monetary policy during the
period 1952-1986 when he was an employee of the Federal Reserve. Axilrod then extrapolates
what it was like to analyze monetary policy after he moved on to the private sector in 1986.
There are six separate chapters in this book that focus on each of the Federal Reserve chairmen
from William Martin to Ben Bernanke along with summaries of Federal Reserve policy in the
form of introductory and concluding remarks. Axilrod also discusses how the Federal Reserve’s
image has evolved over the years when it went from being a large regulatory institution to
becoming the fourth arm of the US government. How did this important transition happen?
What does it tell us about the structure and function of financial institutions in general and the
Federal Reserve in particular? And, above all: How does the formulation and implementation of
monetary policy animate the US Federal Reserve as an institution?
KEYWORDS: Dodd-Frank Act, Dual Mandate, Federal Reserve-Treasury Accord, Financial
Literacy, FOMC, The Great Moderation, Interest Rates, Monetary Policy.
I. Introduction
Does it matter who makes monetary policy? Or is monetary policy so technical by
definition that we can be indifferent to ‘who’ makes it and focus instead on ‘what’ it is
at any point in time? The main contention in this book is that while there is a technical
element to monetary policy, we cannot be indifferent to who actually makes monetary
policy. While we know that monetary policy is made by the Chairman of the Federal
Reserve Reserve and the members of the Federal Reserve Open Market Committee
(FOMC), it is not the case that monetary policy will be the same irrespective who is in
charge. This is not merely because the members of the FOMC tend to be hawks or doves

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(depending on how seriously they take their responsibility in managing inflation, the
money supply, and in furthering the dual mandate). It also pertains to how the
members interact amongst themselves. The interpersonal dynamics of the FOMC will
affect its approach to the formulation, communication, and implementation of monetary
policy. What Axilrod brings out effectively in this book is the fact that monetary policy
is affected by not only those who articulate the policy but also by the socio-economic
circumstances of the time. It is also affected by monetary history and what the members
make of their understanding of where the Federal Reserve is coming from. The main
point of writing this Federal Reserve memoir for Axelrod is to make sense of how these
interactions affect monetary policy from the point of view of an economist who not only
participated in managing the Federal Reserve staff effectively, but also watched the
formulation of Federal Reserve policy from close quarters in Washington DC. It is not
unfair to say that the interaction between the institution and those who staff it is an
important clue to the formulation, articulation, and deployment of monetary policy.
While Axilrod may be focused on the Federal Reserve, the interpersonal dynamics that
he calls attention to will be of interest to any financial institution.
What this interesting book brings to light are the specific forms of interpersonal
dynamics within the FOMC and how that can be related to the age-old debate about
whether the Federal Reserve should rely on monetary policy rules or exercise its
discretion in every single instance of policy making. While I mention only this problem
in the context of the relationship between monetary policy and monetary theory,
understanding the institutional history of the Federal Reserve will provide the
necessary historical contexts for a range of problems in monetary economics. Axilrod’s
remarks on the evolving image of the Federal Reserve can then be understood in the
context of how the images of the chairmen and the image of monetary policy as a
discourse get reflected in the images of the Federal Reserve as an institution. Readers
may want to begin by taking in the broader overviews and discussions on the images of
the Federal Reserve before making their way through the case profiles of the different
chairmen so that they do not lose the broader perspective of what is really at stake in an
institutional history of the Federal Reserve albeit in the form of a Federal Reserve
memoir.
II. The Six Chairmen of the Federal Reserve
The six chairmen in contention during the period covered in this book include William
Martin, Arthur Burns, William Miller, Paul Volcker, Alan Greenspan, and Ben
Bernanke. Axilrod had served under all the chairmen from Martin to Volcker, but
includes Greenspan and Bernanke as well in this book because their policy

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interventions were hugely important and influential. Here, again, it might be better to
read this book with the profiles of recent chairmen in mind unless the reader has prior
knowledge of the earlier chairmen and their contributions to monetary policy. Axilrod
also considers their strengths as administrators of the Federal Reserve since chairmen
are not doing monetary policy all the time. They also need to demonstrate the ability to
lead the Federal Reserve’s staff and create an effective research program in monetary
economics, history, and policy at the Federal Reserve. An important theme in this book
is the kind of research that is done by Federal Reserve economists and the differences
between what they do in monetary policy and what their counterparts in monetary
theory do in the universities. These differences are widely overlooked but crucial since
doing research in the context of policy-making is not the same as doing research from a
theoretical point of view though monetary policy is, needless to say, a form of applied
theory within the specific contexts of monetary history. The best example of this is the
enormous success of the St. Louis Federal Reserve in not only doing research in the
history and function of monetary policy, but in making its research available through its
influential Review to whoever might be interested in the academic and policy-making
communities. Professional economists contemplating careers in researching problems in
monetary economics might find these differences interesting since Axilrod himself
began as an economist who was trained at Harvard University and the University of
Chicago and would periodically wonder what was at stake in terms of doing research at
the Federal Reserve Reserve and the Reserve Banks affiliated to the Federal Reserve.
This is not unlike strategy consultants pondering on the differences between the types
of research that they do and what strategy faculty do in business schools. The synergies
between these forms of research should be obvious from the fact that these Reserve
Banks interact with a large number of speakers and researchers from the banking and
financial communities.
III: Functions of Federal Reserve Chairmen
A point that Axilrod should have made but does not do so is the research done by the
chairmen of the Federal Reserve themselves since recent appointments like Ben
Bernanke and Janet Yellen have done more than their fair share of research in monetary
theory and monetary policy in the university system before being appointed to the
Federal Reserve Reserve. In addition to the research function, chairmen also have a
teaching function as can be demonstrated through the anecdotes in this book on how
much effort they take to make sure that those who represent the Federal Reserve in
public fora should have a sound understanding of Federal Reserve policy on a range of
issues. The Federal Reserve’s communication policy then serves not only the function of

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articulating monetary policy effectively through press conferences, town-hall meetings,
and talks by the Chairman and the Governors, but also furthers the goal of increasing
the extent of financial literacy in the communities attached to the Federal Reserve
Reserve System and the broader-economy. Another point that is of interest but which
perhaps did not play an important role during Axilrod’s long career at the Federal
Reserve is the use of online resources that the Federal Reserve has invested in to
enhance not only the levels of financial literacy of Fed watchers, but to also increase the
levels of transparency with which Federal Reserve policy is conducted nowadays. An
interesting aspect of Axilrod’s career at the Federal Reserve is that he belongs to a
period in which Federal Reserve policy was mainly conducted in secrecy given that the
great era of moderation began only around the time he moved to the private sector in
the late 1980’s. What exacerbated this secrecy in Federal Reserve deliberations was the
fact that the Federal Reserve was often under political pressure during presidential
elections. Axilrod even relates an anecdote in which Paul Volcker was summoned to a
secret meeting at the White House when Ronald Reagan was up for re-election and
given a hint that he should keep interest rates low to increase Reagan’s chances of
getting re-elected. Volcker was horrified at the very suggestion that he could be told
what to do by another arm of government since the Federal Reserve-Treasury Accord of
1951 made it the sole responsibility of the Federal Reserve to determine short-term
interest rates.
IV: Monetary Policy and Federal Reserve Legislation
While Paul Volcker took the Accord of 1951 seriously (since it increased the Fed’s
autonomy), he repeatedly ignored the dual mandate’s goals of maximizing employment
and maintaining stable prices. Volcker became an inflation targeter for all practical
purposes even though he was not legally required to become an inflation targeter. This
is all the more surprising since these provisions relate to the Employment Act of 1946
and the Humphrey-Hawkins Act of 1978 – laws that should have been well-known to
him during his stint at the Federal Reserve (1979-1987). What are we to infer from this?
Are we to infer that the Federal Reserve had internalized the provisions of the Federal
Reserve-Treasury Accord of 1951, but not subsequent legislation that affects its original
mandate from the Federal Reserve Reserve Act of 1913? While Volcker is seen as the
person who struggled endlessly with inflation, most experts overlook the fact that the
Federal Reserve’s mandate does not require Volcker to take so much trouble. As
Axilrod points out, interest rates shot all the way up to 20% under Volcker. Was this
really required? Did Volcker destroy his regime by becoming an inflation targeter to the
exclusion of the Federal Reserve's mandated goal of both ‘maximizing employment and

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stable prices?’ These then are some of the interesting questions that will emerge in the
reader’s mind when he considers the careers of recent Federal Reserve chairmen. An
interesting challenge for Axilrod is to make sense of Greenspan and Bernanke despite
the fact that he did not personally serve in the Federal Reserve when they were in
charge. The challenge is all the more difficult because their terms were marked by both
economic prosperity and crisis. Greenspan was rather taciturn in his approach to
Federal Reserve communications while Bernanke made Federal Reserve
communications a top priority. It would be fair to say that between them they set
important precedents in monetary policy and what Janet Yellen will do as Chairwoman
in the near future will depend on these monetary policy precedents. It is therefore
important to consider their legacy carefully and the changes that have been introduced
by the Dodd-Frank legislation of 2010.
V. Conclusion
The transition from Greenspan to Bernanke is also important because it marked the end
of the era known as the Great Moderation when it appeared that monetary policy had
been put on a sound theoretical and policy basis. Both macroeconomists and monetary
theorists thought their discourse had attained the status of a science, and the attempt to
co-ordinate monetary theory with monetary policy and fiscal policy had resolved
important questions in Federal Reserve policy for at least a generation. The financial
crisis of 2008 however forced a rethink on the foundations of monetary theory,
macroeconomic theory, and economics as a profession. It also forced a rethink on the
theory and function of regulation and on whether central banks should take over the
regulatory function for the financial system in general and the banking system in
particular or whether it is better to spawn a number of small regulators who will co-
ordinate amongst themselves to ensure greater levels of stability in the financial and
banking systems. While this book does not pretend to answer all these questions, it does
a good job of at least raising them. It should therefore be read by any prospective
Federal Reserve staffer, economist, or student of monetary policy. I would even go to
the extent of saying that this book makes an important contribution to an area that it did
not intend to contribute to but wound up contributing anyway: institutional economics.
Unless the institutional contexts of monetary policy are well-understood, readers will
be unable to differentiate clearly between the combinatorial possibilities of monetary
theory as such and the institutional articulation of monetary policy as specific forms of
monetary policy intervention. This book goes a long way in making that differentiation
clear to readers. It will also be of interest to the ever increasing band of Fed watchers
whose interest in these matters is probably related to the out-reach programs launched

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by the Federal Reserve in recent years under the aegis of the Fed’s emerging
communication policy and its ongoing attempts to enhance financial literacy. This book
should be read by anybody who wants a career either with the Federal Reserve or
whose career will be affected by what the Federal Reserve does when it goes about its
work. This is all the more important in a world where the Federal Reserve serves to not
only formulate, articulate, and implement monetary policy, but also serves as the main
regulator to the banking system as a whole.