Question

Janet Yellen, the Federal Reserve Chairman, is often times called the second most important person in the United States or even the world, after the president of the United States. However, she was not elected. The chairman does not have to obey any elected official, even the president. Do you believe that the independence of the Federal Reserve Chairman is beneficial to the country? Why or why not? Be sure to cite at least two reasons.

Answer 1

In short, the answer is that the Federal Reserve should remain "Independent."

It is important to note that the key objective of the federal reserve is to promote economic growth and the maintain price stability in the economy. The federal reserve ensures price stability with expansionary or contractionary monetary policies (as needed). With this overview, the following are the important reasons why the federal reserve should remain independent.

1. There are times when the Federal Reserve has to take decisions that might not be liked by all sectors of the economy or by the government. Just as an example, when the Federal Reserve increases interest rates to curb inflation, it is an undesirable policy for the government since higher cost of borrowing is not liked by consumers or corporate. However, the Federal Reserve has to pursue the policy to control inflation. The objective of the government can potentially be to keep the masses happy with a short-term goal of winning elections. If the central bank is not independent, the right monetary policy might not be implemented and can result in runaway inflation. A good example is the rate hike by the Federal Reserve since 2015. The government opposed tight monetary policies, but the independent Federal Reserve went ahead with the rate hikes to prevent inflation or asset bubbles.

2. It is also an undesirable scenario for the government to increase taxation or cut government spending. These might be unpopular moves with the voters. If the Federal Reserve is not independent, the government can use the central bank to print money (borrow from the Federal Reserve). While this meets short-term needs of the government, monetizing debt is harmful in the long-term.

Therefore, the government wants to avoid any unpopular move while the Federal Reserve has to pursue unpopular moves so that long-term growth and price stability is maintained in the economy. This is the key reason why the central bank should remain independent.