Question

There are some politicians in the U.S. Congress that believe the Federal Reserve should be less independent from the U.S. government. Some say this would be a disaster for the U.S. economy. Do you agree or not with those who seek to reduce central bank independence? Why? Explain your answer in a comprehensive way, providing any data available and making reference to studies available on this issue.

Answer 1

• Federal Reserve has been created to meet the mandates of stable inflation and high growth rate. Decisions of Fed are not affected by the political pressures. Fed works independently for meeting mandated objectives.
• Scholars have noted that political influence over the working of Federal Reserve would have dire consequences for US economy. Political actions are incentivized and motivated by the popular measures. Political parties always seek to execute such policies that would help them to get reelected for congress.
• Federal Reserve aims at stabilizing economy in long run while political representatives are concerned about short term objectives. There is strong incongruence between these two entities.
• Fiscal deficit of government is rising over the years due to high expenditure on health and insurance. Government debt is rising and further, it may be possible that government starts pressuring Fed to issue new currency to fund the increasing debt of government. Thus, independence of Fed Reserve is precondition for stable economic system and sustained growth rate.

References:

https://www.cbsnews.com/news/why-the-federal-reserve-needs-to-be-independent/

https://www.forbes.com/2009/12/01/grayson-paul-fed-independence-opinions-columnists-thomas-f-cooley.html#7b197b7227e4