The Fed's Chair Background and the Federal Reserve Independence

• Date: 01 January 2019
• DOI: http://doi.org/10.1002/jcaf.22374
• Author: Damir Tokic
• Published date: 01 January 2019

The Fed’s Chair Background

and the Federal Reserve

Independence

Damir Tokic

“The Federal Reserve, like

many other central banks, is an

independent government agency

but also one that is ultimately

accountable to the public and

the Congress. The Congress

established maximum employ-

ment 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 mone-

tary policy decisions focus on

achieving these long-run goals

anddonotbecomesubjectto

political pressures that could lead

to undesirable outcomes. So,

members of the Board of Gover-

nors are appointed for staggered

14-year terms and the Board

chair is appointed for a four-year

term. Elected officials and mem-

bers of the Administration are not

allowedtoserveontheBoard.”

Federal Reserve webpage:

https://www.federalreserve.

gov/faqs/about_12799.htm

Bernanke (2011) states that

“the Federal Reserve’s

operational independence is

critical, as it allows the FOMC

to make monetary policy deci-

sions based solely on the

longer-term needs of the

economy, not in response to

short-term political pressures.”

Statutory, the Federal Reserve

is an independent government

agency with the dual mandate

to ensure stable prices and full

employment. Yet, the literature

shows that the Fed has been

periodically succumbing to

political influence. For exam-

ple, Smith Daniel and Boettke

(2015) study an episodic history

of modern Fed independence,

and describe many factual epi-

sodes of such political interfer-

ences from 1951 to 2014.

Although Bernanke (2010)

states that “the effective degree

of independence at the Fed has

gradually increased over time,”

Boettke and Smith (2014) still

find evidence of compromised

modern-day Fed independence.

Consequently, due to political

pressures, the Fed has a history

of policy errors, which have

produced serious longer-term

market instabilities. For exam-

ple, Meltzer (2010, 2012) states

that the Great Inflation of

1970s occurred because of the

Fed’s inability to ensure price

stability in face of the political

pressures to finance large bud-

get deficits during 1960s and

1970s. Thus, it is important to

further discuss the issue of cen-

tral bank independence.

This article discusses the

link between the Fed’s Chair

background and the Fed’s

independence, which has not

been deeply discussed in the

prior literature. The motiva-

tional factor for this viewpoint

discussion is the fact that the

President appoints the Chair of

the Federal Open Market

Committee (FOMC), who is

also known as the Fed Chair.

The FOMC is the decision

making body that conducts the

U.S. monetary policy, and it

consists of 12 members, five

voting Presidents of the

© 2019 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22374 5