Question

2. Discuss drawbacks of eliminating Fed’s independence and subjecting to the influence of the executive branch.

Answer 1

There are several drawbacks associated with eliminating Fed's independence and subjecting to the influence of the executive branch. One of the most important drawbacks associated with the eleimination of the Fed's independence is the political pressure. Without the necessary autonomy or independence and under the influence of executive branch its decisions will be more populist as well as as politically motivated.

It will make the functioning of the Fed completely election focused and lack of independence will make it very difficult to execute policies which are not populist but are in greater interest the public. The major drawbacks is that if there is eleimination of Fed's independence then there are chances of putting the entire economy or jeopardizing the whole economy for self political gains. Such type of politically-influenced policied would increase uncertainty thus causing or leading  the economy to go through a desdestabilization phase.

Curtailing the independence of Fed and subjecting it to the influence of the executive branch may also  result in adopting those projects and expenditures that are not financially and economically prudent but have potential political advantages. There are several experiences all over the world in which government takes populist decisions that are not economically feasibile. Thus it is very necessary to keep the monetary policy separate from the executive branch in order to maintain the financial health of the state.So if the independence of Fed will be eliminated it will not able to carry on its statutory goals for which it is responsible and become a puppet in the hands of executive . Lack of independence and influence of executive branch will make it to take decision based on political interests rather than the facts and data.In other words, politicization of the Fed and its decision will make the entire economy at risk.