Making Sense of the Federal Reserve
Most nations in the developed world today have an independent central bank. International studies have consistently shown that central banks with a higher degree of independence are more effective at maintaining stable price levels.
The Federal Reserve Act was enacted more than a century ago. Under the law, the Federal Reserve was made accountable to Congress but also was specifically designed to carry out its responsibilities without interference or control from the vested interests inherent in electoral politics, fiscal policymaking, and private banking. In short, the Fed was created as an independent central bank. Of course, there are limits to the Fed’s independence, and independence does not imply that the Fed is not accountable.
Examples that illustrate Federal Reserve independence are:
- Federal Reserve officials cannot be fired simply because the president or a member of Congress disagrees with Federal Reserve decisions about interest rates.
- Similarly, although commercial bankers serve as members of Federal Reserve Banks' boards of directors, they do not establish banking regulations.
- The Board of Governors is nominated by the president of the United States and must be confirmed by the Senate.
With independence, however, comes the obligation for a central bank to be accountable and transparent: It must provide open communication and access to any information that is needed to allow others to understand its decisions. Transparency also ensures the integrity of operations.
Here are a few examples of how the Federal Reserve System is held accountable :
- The Federal Reserve’s policy goals of price stability and maximum sustainable employment are specified by Congress, and Fed officials report regularly to Congress on progress toward meeting those goals.
- The Chair of the Board of Governors must give regular reports to Congress.
- The minutes of FOMC meetings are released to the public after a short time lag.
- The president of each Federal Reserve Bank is chosen by a local board of directors, but the selection must be approved by the Board of Governors.
- Each Federal Reserve Bank is audited every year by independent auditors.
- The budget of each Federal Reserve Bank must be approved by the Board of Governors.