Fed Independence

Purpose

To allow for disciplined, consistent policymaking, anchor market expectations, support stable financial conditions, and ensure decisions are driven by data, not political considerations.

Definition

Freedom from outside political influence to determine monetary policy that is best for the U.S. economy.

Limitations

Not absolute; the Fed only has limited independence.

Effectiveness

Central banks with a higher degree of independence are more effective at maintaining stable price levels.

Accountability

Ultimately accountable to Congress and the public.

Role in Crises

Can minimize damage during crises (market-driven and policy-induced) due to its independence.

Historical Origin

Born in the 1951 Treasury-Fed accord.

1942

1951

An independent Fed allows for disciplined, consistent policymaking that anchors market expectations and supports stable financial conditions. Importantly, the Fed relies on extensive economic data from across the country to guide its decisions—a process that benefits from insulation against short-term political dynamics. [...] The argument for Fed independence is rooted in the idea that sound monetary policy requires a long-term perspective. Economic cycles typically extend well beyond election cycles, and decisions about inflation, employment and interest rates are most effective when driven by data, not political considerations. [...] While the Federal Reserve is ultimately accountable to Congress and the public, its operational independence has become a cornerstone of its credibility. The ability to make difficult but necessary decisions—even when they may be unpopular—is what enables the Fed to maintain long-term economic health.

So Fed independence, like the somewhat more restricted independence of other agencies, is a part of the general checks and balances that so well serve the US constitutional order. The Fed responds to politics, but slowly. [...] In sum, the hue and cry over some sacrosanct “Fed independence” is a bit silly. The Fed only has limited independence, and only should have limited independence. Whether it is too independent or not independent enough are questions one can argue. Also, the right independence for monetary policy (raising and lowering interest rates) may be different than that for asset purchases, bailouts, and other market interventions, and may be different still from that for financial regulation. For example, [...] The Fed’s current independence was born in the 1951 Treasury-Fed accord. From 1942, the Fed had been charged to keep the long run treasury rate below 2.5%, in order to help finance the war, and then to keep down interest costs on the debt. The accord allowed the Fed the independence to raise interest rates in order to fight inflation, a policy Chairman Martin called “leaning against the wind,” and which we would now call a Taylor rule (or Wicksellian policy). Presidents Johnson and Nixon’s

The Federal Reserve (the Fed) is the central bank of the United States. Because of its power and importance in guiding the economy, the Fed's independence from direct political influence has made it a target of ideologically motivated attacks throughout its history, with an especially aggressive round of attacks coming in the wake of the 2008 financial crisis and ongoing today. We defend Fed independence. We point to the Fed's exemplary performance during and after the 2008 crisis, and we offer [...] than appropriate for the long-term health of the economy, we show that Fed independence addresses the risk of self-dealing and other pathologies even when, as now, political actors favor tighter monetary policy than appropriate for the long-term health of the economy. [...] the example of a potential future crisis in which Congress falls to increase the debt ceiling to show how the Fed's independence makes it the only entity that can minimize the damage during crises (both market-driven and policy-induced). We further argue that the Fed's independence is justified to prevent self-dealing by politicians, even when no crisis is imminent. Although the classic justification for Fed independence focuses on the risk that political actors will keep interest rates lower

Independence in the Fed’s case is a term used to describe its freedom from outside political influence to determine monetary policy that is best for the U.S. economy. This is particularly the case if those decisions are unpopular, such as when the Federal Open Market Committee raises interest rates to bring down inflation. But there’s more at stake than simply the level of the three rates the Fed controls. ## What the board controls, and what it doesn’t