Question

Because the chairs of the Federal Reserve Board can have an enormous impact on policy decisions of the Fed and thereby the economy, their selection has been the subject of great political interest. Politically motivated monetary policy could be a ruinous economic policy. Previous Fed chairs have understood their functional independence from congressional interference depends on the apolitical nature of their decisions. What would the economic consequences be if this balance was upset by a president who nominated a Fed chair dedicated to protecting the president’s political party?

Answer 1

The Federal Reserve was established in the year 1913 by America, as a result of the recession which kicked in the country back then. The main aim was to stabilize the economy and present an independent organization which was not under direct government control.

The need for the Federal Reserve to not have any political interest is that any action by the Federal Reserve has a huge impact on the nature of the economy and the demand and supply of money thereof. A wrong decision can seriously hit the credibility of the organization and can lead to serious ramifications for a country wherein inflation could rise, unemployment could increase or the overall GDP may take a serious hit if politically motivated decisions are taken.

For example, if the President was elected on the chair of the Federal Reserve, and the elections were near, the politically motivated decision could be to reduce the interest rates further. Considering that an economy was already experiencing inflation. This would result in a situation wherein hyperinflation may come into existence in which the value of the currency may fall rapidly in the near future.

Thus, as Monetary Policy decisions may happen with a lag and have serious ramifications if implemented incorrectly, it is recommended throughout every country that the Central Banking agency be left alone without the interference of the government at large to avoid political economic mistakes.

Please feel free to ask your doubts in the comments section if any.