To what extent is the Federal Reserve independent of political pressures? Is this independence appropriate?

Question

To what extent is the Federal Reserve independent of political pressures? Is this independence appropriate?

Answer 1

Independent of political pressure?? Not at all! That's silly.. and like saying church and state have been separated.

Answer 2

The Board of Governors are all appointed for 14-year terms by the president and confirmed by congress. It operates per it's charter and laws set by congress and is overseen by congress. Audit reports are required at least once a year as well as meeting directly with congress.

Though considered an independent government agency, the Fed is still susceptable to political pressure. When Congress has a concern, they call the Fed chairman to the hill to 'discuss'. If Congress isn't satisfied, they may pass a law or two to make the Fed pay attention, or simply ensure the next appointee 'understands' Congressional wishes.

The most obvious and transparent example was Greenspan's endorsement of Bush tax cuts. The Republican Congress put a lot of pressure to get that. In Greenspan's book, that's one of his biggest regrets is endorsing the cuts that brought record deficits to the economy,

- Is the independence appropriate?

Absolutely. The power and temptation to create money with the stroke of a pen is highly alluring. Look up "hyperinflation" and you'll see that virtually every case was the result of the ruling power printing money to pay for expenses.

In the latter part of the 20th century, most central banks moved toward being more independent within their government as further protection against over supply of money

Answer 3

They are independent.  The president nominates members of the board and congress confirms the appointments.  Other than that there is very little the president or congress can do to influence the Federal reserve board.  For one the Fed don't report to the president or congress.  The Fed are self sustained.   Their budget is not determined by congress or the federal government.   They get their funding from profits.   So without any real type of influence from politicians and the president the board can focus on their dual mandate without interference.  

Is this independence appropriate you ask, well lets just say that the numbers say that the more independent a central bank is the small the inflation tends to be.  This can be explained in the fact that when politicians can influence a central bank they can influence policy to favor their re-election.  Say for example create monetary policy to decrease unemployment right before election time.   An independent central bank is free to focus on monetary policy to achieve a long term objective rather than a short term objective that favors politicians.

Answer 4

The Board members are nominated by the President and confirmed by the Senate for 14 year terms. That's fairly free of political pressure. Is this appropriate? The Congress certainly thought so when they created the long term appointments.