Question

Explain what we want the Federal Reserve to be independent of, why that is important, and what parts of its structure help give it independence.

Answer 1

The primary need behind the Fed to be an independent body is that a free independent body can best serve the long term economic interest of the country. If the body is subjected exclusive control of the legislature, it will be under pressure of politicians to get done the short term political interests. If the politician influences the Fed for short term interest of increasing employment, that would leads to undesirable economic outcomes. When Fed is subjected to political pressure, the politician may pressure on Fed to pursue excessive expansion in money in order to create more employment in shortrun. This creates higher inflation and larger unemployment in longrun. In order to avoid the political influence and pressure upon the Fed, the government in United States structured the Federal Reserve as an autonomous body completely insulated from outside interference.

The Federal Reserve Bank is the central bank of United States which is an independent body completely free from both executive and legislative branches of congress. The Federal Reserve Act was passed in 1913 when Woodrow Wilson was the president. The body was designed to carry its responsibilities without external interference and control especially by the politicians. It is a sole independent body in taking monetary policy decisions in order to promote maximum employment with price stability. The appointment of the Board of Governors is the exclusive discretion of the President. The members are nominated by the president. The Chairman and Vice chairman of the Board is also nominate by the President. Each governor enjoys larger tenure in the office larger than other government agencies. The Fed governors have 14 years of tenure and the chairman and Vice Chairman has 4 years tenure in office. The Board of Governors are nominated by the president with the confirmation of Senate. They are not serving the office at the pleasure of president or the executive body and they cannot be removed from office before the expiry of the tenure. There is no political interference in the appointment of the members of Fed. Funding of Fed’s budget not subjected to fund from congress. It is a self funded body at its fund comes from interest on securities and the fees it receives from the services provided to the depository institutions. These financial arrangements make it completely free from political pressure and influence. The budget of the Fed is approved by the Board of Governors. Each Federal Reserve Regional Banks are audited by independent auditors every year. The policies of the Fed need not to be ratified by the president or any legislative branches.