Federal Reserve Indepence

1. What gives the Fed its independence?

The Federal Reserve System is an independent entity within the government. It operates autonomously within a framework of economic and financial policy objectives established by the government. Although its decisions are not ratified by the executive branch, it is subject to congressional oversight. For instance, its Chairman periodically reports to Congress. Its structure was designed by Congress to provide a broad perspective on economic activity in all parts of the country and to create a balance between public and private control. Although the Reserve Banks were created by legislative act, they receive no budget appropriations from Congress. Each of them is self-sufficient, earning income from interest on holdings of U.S. Treasury securities, from interest on loans to depository financial institutions, and from fees for the services provided to those institutions.

2. What is it independent from?

Economic theory and massive amounts of empirical evidence make a strong case for maintaining the Fed's independence. When central banks are subjected to political pressure, authorities often pursue excessively expansionary monetary policy in order to lower unemployment in the short run. This produces higher inflation and higher interest rates without lowering unemployment in the long term. This has happened over and over again in the past, not only in the United States but in many other countries throughout the world.

3. Proposals to change the oversight of the Federal Reserve

Bill written by Representative Kevin Brady, a Texas Republican, that would alter the structure and goals of the Federal Reserve System. Known as the “Sound Dollar Act of 2012,” the bill would move the Fed to a single goal of stable prices, eliminating a second mandate to balance that with full employment. It would also amend the Federal Reserve Act to give all 12 district presidents a vote on Federal Open Market Committee, instead of five today. The...