Federal Reserve Bank
Leaning on The Fed
Monetary Policy

Leaning on The Fed

The Issue:

The independence of the Federal Reserve helps to ensure that it can make politically difficult decisions that are in the long-run best interest of the economy. Vacancies and expiring terms at the leadership of the Fed make this a particularly vulnerable time for Fed independence.

The Facts:

  • Economies perform better under central banks that are more independent. To illustrate, among a group of advanced economies, average inflation is significantly lower in countries with more independent central banks (see chart).
  • The Federal Reserve aims to maintain low unemployment and keep prices stable. It sets interest rate policy and plays a role in regulating and supervising the financial system. Since the Fed’s decisions impact the economy and, through this channel, the political climate, politicians may want to influence its decisions.
  • Economists debate whether monetary policy should be conducted based on rules or in a more discretionary manner. But there is agreement that politically-influenced policy would increase uncertainty, cause the economy to go through fits and starts, and in general be destabilizing and corrosive.