The Independence of the Federal Reserve Board
We hear about the importance of the independence of the Federal Reserve Board in the media all the time now, but what does that mean and why is it important. The Federal Reserve Board (FED) was established by an act of Congress in 1913 and amended in 1977. The FED is charged with increasing long-term production, maximum employment, maintaining stable prices and moderate long-term interest rates. The FED operates as an independent entity within the government and can raise or lower interest rates without the approval of the President or any part of the executive or legislative branches of government. This allows the FED to act independently for the long-term benefit of the economy and not for short-term political gains.
The cost of applying pressure to the FED to lower interest rates in order to artificially boost the current economy may look good in the short run, but almost always leads to higher inflation down the road. This would go against maintaining stable prices. The FED’s independence is magnified when you look at the international credibility of US global markets. With the US dollar being a global currency and America being a global economic leader, the loss of independence would put into question the US being a stabilizing economic leader in the global economy. Experience around the world has also shown that countries with independent central banks that are able to make decisions free from political influence have better economic outcomes for their citizens.
FED members are appointed by the President and confirmed by the Senate for staggered 14-year terms. The chair and the vice chair are appointed by the President and serve four-year terms which can be renominated by the then current president for consecutive terms until their appointment on the FED expires. Currently, Chair Jerome Powell’s term as chair expires in May of this year. He could remain a member of the FED until his appointment ends in January of 2028, however. Powell was initially appointed Chair in May of 2018 by President Trump and reappointed Chair in May of 2022 by President Biden. The President can only remove a member of the FED prior to their term ending “for cause.” This is interpreted as inefficiency, neglect of duty, or malfeasance in office.
Although the FED is an independent entity, it is accountable to Congress. Reports are frequently required, the Chair testifies regularly to Congress, and its accounts are audited annually by an outside agency.
While setting the interest rate is one tool, there are others in the FED’s coffers. Some of these include bank reserve requirements and open-market operations. The FED can raise or lower the reserve requirement of banks which influences how much money they can lend. This affects the quality of loans made by banks and shores up the viability of US banks in America and internationally. Open market operations allow the FED to buy or sell bonds to control money supply and further affect interest rates. This ensures the stability of the open markets and provides some protection for US debt globally.
Although these are just a few of the resources available to the FED, the independence from political short-term pressures is vital to preserving the long-term stability of the US dollar both in the American economy and in the global marketplace.
