Many people are surprised to learn that the central bank of the United States operates in part independently of the government. The combined public and private structure of the Federal Reserve (Fed) is highly controversial, especially in the aftermath of the financial crisis of 2007- 2008.
The monetary decisions of the Federal Reserve do not have to be ratified by the President (or anyone else in the Executive Branch). The Fed receives no funding from Congress, and the members of the Board of Governors, who are appointed, serve 14-year terms. These terms do not coincide with presidential terms, creating further independence.
However, the Federal Reserve is subject to oversight by Congress, which aims to ensure it achieves the economic objectives of maximum employment and stable prices. And the Fed Chair must submit a semi-annual report on monetary policy to Congress.
The primary justification for an independent Federal Reserve is the need to insulate it from short-term political pressures. Without a degree of autonomy, the Fed could be influenced by election-focused politicians into enacting an excessively expansionary monetary policy to lower unemployment in the short-term. This could lead to high inflation and fail to control unemployment over the long-term.
Advocates of autonomy argue that an independent Fed will better address long-term economic objectives. Independence can also make it easier to execute policies that are politically unpopular but serve a greater public interest.
Critics argue that it is unconstitutional for Congress to assign a constitutional power to an independent government agency. According to the Constitution, Congress has the power to coin money and regulate its value. In 1913, Congress delegated this power to the Fed through the 1913 Federal Reserve Act. However, some argue that such a delegation is fundamentally unconstitutional. Opponents of Fed independence also suggest that it is undemocratic to have an unelected agency, unaccountable to the US public, dictating monetary policy.
The Bottom Line
Fears over the massive expansion of the Federal Reserve balance sheet and questionable bailouts to firms such as American International Group, Inc. (A.I.G.) have led to demands for increased transparency and accountability. Recent calls in Washington to 'audit' the Federal Reserve could potentially undermine the independent status of the US central bank.