Discussion Topic

The importance of the Federal Reserve's independence from political control

Summary:

The Federal Reserve's independence from political control is crucial for maintaining economic stability and credibility. It allows the Fed to make decisions based on economic data and long-term goals rather than short-term political pressures, ensuring that monetary policy remains focused on controlling inflation and promoting employment. This independence helps prevent politically motivated decisions that could lead to economic volatility.

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Why is the Federal Reserve allowed to be relatively independent of political control?

The Federal Reserve (often called the Fed) is allowed to be independent because its job is to make sure that the economy is strong and stable in the long run.  Politicians are often not very interested in the long run.  They are worried about the short term.  This is particularly true when it gets closer to election time.  Politicians want to do things that will get them reelected, not things that will be good for the economy in the long term.

If the Federal Reserve were to be controlled by politicians, it would no longer be able to do what is best for the economy in the long term.  Instead, it would have to do what politicians want to spur the economy in the short term, regardless of the long-term consequences.  For this reason, it is best that the Fed should be independent of political control. 

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Why should the Fed remain independent from political authority?   

The Federal Reserve Board should remain independent from political authority because the decisions it makes have a tremendous impact on the economy. If the Federal Reserve Board was a political body, it might make decisions based on helping a party get its candidates elected. For example, the Federal Reserve Board dictates interest rates in the United States. If they wanted to reduce unemployment by facilitating the creation of jobs, they could lower interest rates. This would encourage businesses to expand, which could lead to job creation. The political party in power could claim credit for this by saying that it influenced the Federal Reserve Board to develop these policies that would help the American people. While creating more jobs is usually a good thing, if the economy is doing well, lower interest rates could lead to inflation, which would be undesirable.

Economic decisions need to be made without regard to political ramifications. Once politics become involved, the waters get muddied. A good example of this is how difficult it is for Congress to make changes to entitlement programs such as Social Security or Medicare. Many Americans fiercely resist changes to these programs and threaten to not support candidates who want to make changes to them. The Federal Reserve Board is free from these political pressures and can make decisions without political consequences, allowing them to make decisions that are in the best interests of the American economy. In today’s political climate, we are seeing how difficult it is for political parties to make decisions and policies on critical issues such as health care and immigration.

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Why should the Fed remain independent from political authority?   

The reason that the Federal Reserve System (the Fed) should remain independent of political authority is that it needs to be independent so that it can make its decisions based on what is best for the economy in the long run, not what is politically expedient.

A good way to think about this is to look at the current fiscal situation that the elected branches of government have created.  It is to some clear that something has to be done to reduce our deficits.  We seem to need to reform entitlements such as Medicare and Social Security.  This seems necessary for the long term health of our economy.  Nothing has been done to address this.  The main reason for this is that it is not in the short term interests of either political party to advance such reforms.  Any party that does so risks losing elections as the other party claims that no reforms are necessary (which is a position voters typically like). 

What this shows is that elected branches of government are not experts at long-term economic analysis.  They are motivated by the need to win the next election.  Therefore, if the Fed were under political control, it would be forced to take actions that would not be helpful to the economy.  It would be forced to do what was needed to win elections for the party in power, not what was best for the economy.

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