ECON102: Unit 5.2 Discussion - The Federal Reserve

Discuss the Fed’s independence from government? Why is it important for the central bank to be independent from government? What is the outcome in other countries whose central bank is controlled by the government? Do you think the U.S. Federal Reserve has too much influence and power over the U.S. economy?

Independence is freedom from government mandates, the ability to implement monetary policy as central bankers (rather than politicians) see fit. This implies that the central bank and federal reserve are independent of the government, and policy choices do not need to be approved by the President. The Fed gets no direct financing from Congress or its Board of Governors.

However, the central bank/Federal Reserve is subject to certain congressional monitoring in order to guarantee that the economic objectives of maximum employment and stable prices are met. In addition, the Fed Chair must submit to Congress a semi-annual report on monetary policy.

The major reason for an independent Federal Reserve is to protect it from short-term political pressures. Without some degree of independence, the Fed may be swayed by election-focused politicians into conducting an overly expansionary monetary policy in order to reduce unemployment in the short term. This might result in excessive inflation and a failure to manage unemployment in the long run. Economists assume that when a country’s central bank gains independence, the average inflation rate will fall.

Whilst the Fed was created as an initiative by congress, it is independent from governmental control. However, it still has public/governmental input. It is important to be independent so that one entity (gov) cannot become dictatorial in nature and overthrow the health of the people for themselves. I think the weight is still heavily on the public side of the coin, and hence should be weighted more evenly to have private sector input.