Question

1. Periodically, a Senator or Congressman submits legislation to bring the Federal Reserve under the direct control of Congress.  Thinking about the policy objectives of the Federal Reserve System, explain why an independent central bank might more effectively achieve its policy objectives.

Answer 1

Federal Reserve is the foremost monetary authority in the US banking system. It has been mandated to maintain full employment and price stability in the economy. It is the congress that has provided independence to the Federal Reserve. there are many instances where congress members seek to reduce the independence of the Federal Reserve by taking it under the congress. But would not be the interest of overall economic stability to keep the Fed under the supervision of Congress. it would lose its ability to fight against the odds.

If the Fed is kept under the congress control, the most probably all economic decisions of the Federal Reserve would be politically motivated which would harm economy unprecedently. The government would seek to win the votes by following the short term policies related to the money supply. The Fed objective of price stability shall be damaged significantly.

There are a host of instances across the world where the compromises on central bank independence led to the devastation of the whole economy. Zimbabwe and Venezuela are of examples where under the pressure of the government, Central banks issued the excessive money supply, and that caused the hyperinflation in the economy.

Thus, it is incumbent on the government to maintain the independence of the central bank to keep economy healthy.