Question

What are two unique characteristics about the FED which allow it to maintain its independence?

Answer 1

Composed of twelve regional Federal Reserve Banks, the Fed is governed by a Board of Governors in Washington , DC, to establish and enforce the nation's monetary policy to encourage full jobs, stable prices and moderate long-term interest rates. Congress granted the Fed specific characteristics that help ensure its independence from both the executive and legislative branches: a much longer tenure for members than other agencies, spread through several administrations and congresses, and its own funding mechanism that makes the Fed independent of Congressional appropriations.

The governors of the Fed have staggered and lengthy 14-year non-renewable terms, the chairman has a four-year term, and members of the board are nominated by the president and confirmed by the Senate without regard to political affiliation. In contrast, Securities and Exchange Commission (SEC) commissioners, although an autonomous body, serve five-year terms and are chosen on the basis of their political affiliation, with the commission being officially nonpartisan. Commission rules state that the same political party can belong to no more than three commissars. The legislative wording means the commission is on a 3-2 split at all times. In other words, because SEC members are chosen on the basis of their political affiliation, the SEC is necessarily partisan; the Fed is not, because Fed governors are not chosen on the basis of political affiliation.

Unlike other federal departments, the budget of the Fed does not fall under Legislative appropriations. Alternatively, the Fed is self-funded, largely by the interest received on the assets it holds, and the fees it charges for services it offers to depository institutions such as check-clearing, fund transfers and automated clearinghouse operations. The financial structure is vital to the Fed 's independence, enabling it to function independently of day-to-day political interference from partisans. If the Fed were under the regular appropriations process, such decisions could be pressurized not because they constitute good monetary policy It should be noted that there have been many proposals in Congress over the years that would subject the non-monetary policy functions of the Fed to appropriations, while retaining the existing funding mechanism solely for its monetary functions. By refusing to include monetary functions in these measures, Congress is signalling once again the need to keep monetary policy independent of political control.