After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U. The Congress established maximum employment and stable prices as the key macroeconomic objectives for the Federal Reserve in its conduct of monetary policy.
The Congress also structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes.
So, members of the Board of Governors are appointed for staggered year terms, and the Board Chair is appointed for a four-year term. Elected officials and members of the Administration are not allowed to serve on the Board. How is the Federal Reserve System structured? Is the Federal Reserve accountable to anyone? These higher interest rates discouraged borrowing for consumption and investment, contributing to back-to-back recessions and an unemployment rate that peaked at nearly 11 percent.
Home builders across the country were concerned about interest rates. We Need You. Please Lower Interest Rates. Jackson Miss. Home Builders. Volcker's policies quickly made him one of the most unpopular people in the United States. Farmers protested the high interest rates by driving their tractors to blockade the Federal Reserve's headquarters in Washington D.
But it wasn't until the summer of that Volcker felt confident that the Fed had broken the back of inflation. Today, many economists credit the long period of low and stable inflation since the Volcker years to his willingness to stand against popular pressure and deliver the powerful medicine needed to cure the nation's economic ills. While Volcker's persistence was necessary, the Volcker Disinflation as it is now known , was only possible because the Federal Reserve had enough independence that its leadership could take the unpopular but necessary measures needed to reduce inflation.
The Federal Reserve Act, and the resulting institution, reflect two foundational beliefs—independence and accountability Throughout its history, the Federal Reserve has felt the tension between these objectives—maintaining the independence necessary for sound policymaking while also remaining accountable to the electorate. Here's why independence matters: Elected officials serve relatively short terms; for example, two years for U.
While short term lengths ensure that elected officials are accountable to the public, they can also create political incentives for politicians to pursue short-run outcomes over long-run outcomes.
In other words, politicians are prone to focus on the next election—which creates what some refer to as the "political business cycle. In economic terms, this can lead to an inflationary bias an ongoing preference for lower interest rates. In contrast, effective economic policymaking often requires a focus on the medium to long run.
For example, Volcker's policies resulted in job losses for many Americans in the near term. Over time, however, his policies restored people's confidence in the central bank's ability to maintain low and stable inflation rates and ushered in a period characterized by high employment and low inflation. This era is sometimes referred to as the Great Moderation. As the Volcker era exemplified, creating an independent central bank allows governments to insulate monetary policy from short-term political motives.
Evidence suggests that countries with central banks with high levels of independence also have lower average inflation rates. In many ways not surprisingly the structure of the Federal Reserve System is similar to the structure of the U. The economic power of the Federal Reserve is not concentrated in a single, or few, hands in Washington, D.
Rather, monetary policies are made by policymakers distributed across the country. The Federal Reserve balances national and local interests by having a centralized national Board of Governors and 12 decentralized regional Federal Reserve Banks.
It is an agency of the U. The Board of Governors has broad oversight responsibilities for the operations and activities of the 12 Federal Reserve Banks. As such, the Board of Governors ensures that national interests are represented. They provide financial services, supervise and examine banks, and lend to depository institutions within their Federal Reserve District.
The 12 Federal Reserve Districts span the country geographically Figure 2 and gather information about the businesses and communities in their respective region. Fiscal Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Central Banks. Introduction to the Fed. The Fed's Roles and Functions. Monetary Policy Federal Reserve. Table of Contents Expand. The Fed as Quasi-Governmental. Why Be Independent? Arguments Against Independence. The Bottom Line. Key Takeaways Central bank independence refers to the question of whether the overseers of monetary policy be completely disconnected from the realm of government.
Those favoring independence recognize the influence of politics in promoting monetary policy that can favor re-election in the near-term but cause lasting economic damage down the road. Critics of independence say that the central bank and government must be tightly coordinated in their economic policy and that central banks must have regulatory oversight. Article Sources. Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
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