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The Federal Reserve System is considered to be an independent central bank. It is so, however, only in the sense that its decisions do not have to be ratified by the President or anyone else in the executive branch of the government. The entire System is subject to oversight by the U.S. Congress….the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government.

https://www.frbsf.org/education/publications/doctor-econ/2003/september/private-public-corporation/

Here, it says that the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government, but how does the government establish that overall objective, and is there a limitation to what the objective can be? Does Congress need to approve what that objective is? It also says that Congress can oversee the Federal Reserve, does that mean they can probe the Federal Reserve to ensure it helps it works within that framework, or something else?

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    I think you're overthinking this. Every business and organization must obey laws established by Congress, and these laws come from the overall objectives and policies of the government.
    – Barmar
    Oct 24, 2023 at 19:03
  • @Barmar: No, an independent central bank would absolutely not be required to "obey" policy targets set by the current govt. If the Trump or Biden admin attempted to order them "Keep unemployment below(/above) X% or interest rates below Y%" or even "Avoid home prices dropping 30% before the 2024 election", they could in principle disregard those.
    – smci
    Oct 25, 2023 at 23:20
  • @smci Not the administration, Congress. The Federal Reserve was created by Congress, they can set rules for it or abolish it.
    – Barmar
    Oct 26, 2023 at 15:26
  • @Barmar: ok. The question only said "policy... framework" which is an infinitely more vague thing than "legislation". In principle Congress can pass legislation about the Fed's objectives, in reality this rarely happens, like a handful of times since 1913, and needs bipartisan support in both houses, which in practice means lobbyists for the finance industry can torpedo most attempts. The current ongoing attempt 2009-2023 Federal Reserve Transparency Act has not passed.
    – smci
    Oct 29, 2023 at 1:42
  • "influence... policy... framework" could merely have meant Congress giving the Fed Chair a hard time at a hearing, but no legislation.
    – smci
    Oct 29, 2023 at 1:45

2 Answers 2

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Question:

How can the U.S. government influence the Federal Reserve?

The federal reserve is designed to be insulated from political interference when conducting monetary policy. Politicians are incentivized by election-cycles to prioritize short-term gains and ignore longer-term costs. Short term solutions can be very harmful to an economy. Like not raising interest rates as an economy is growing too quickly. Raising interest rates is always unpopular as is slowing the economy; but slowing the economy allows it to continue to grow longer. So in the long term it's the better option. The intent of this insulation is not to free the Federal Reserve to pursue whatever policy it prefers but to provide a credible commitment by the government to achieve its goals as defined by Congress, especially price stability/inflation targets which require the kind of fiscal discipline which is typically politically unpopular with the public.

To your point, independence has to be balanced with accountability. The problem is all accountability is an avenue which invites destructive pressures. As does the lack of accountability. The history of the Federal Reserve is defined by the government trying to both limit and expand it's authority over the Federal Reserve.

How is the Federal Reserve Accountable to the rest of governments.

  1. The Federal Reserve has specific, external economic mandates set by congress.
    • price stability
    • inflation index targets
    • maximum sustainable employment
    • etc.
  2. The Congress
    • holds formal semiannual testimonies with the Chairman of the Federal Reserve where all it's finances and policies are reviewed.
    • reports it's finances to Congress quarterly.
    • Each Federal Reserve Bank is audited every year by independent auditors.

The federal reserve doesn't spend U.S. tax dollars. The federal reserve makes money (both literally and figuratively), figuratively by charging bank fees on transfers and on interest from securities it acquires in the course of the Federal Reserve's open market operations.. The money made over and above it's expenses are given to the U.S. Treasury. Congress keeps a close eye on Federal Reserve expenses and funds on hand through these series of financial reports from both internal and external federal reserve resources.

  • The Senate approves every seat on the Federal Reserve board. Including the Chairman and Vice Chairman seats of the Federal Reserve.
  • Congress can pass legislation that directly requires a specific monetary policy action. (not desirable, but they've done it)
  • specify particular qualifications for Board members
  • can demand an accounting on policy by summoning the chairman, board members, and Reserve Bank presidents to impromptu hearings
  • Congress can abolish or change the Federal Reserve
  1. The Executive.

    • The Federal Reserve Chairman meets multiple times a week with the Secretary of the Treasury, where policy is discussed.
    • The Federal Reserve Chairman also serves on various and changing economic advisory boards for the President.
    • The President has the authority to fire any board member on the Federal Reserve for cause.
    • The President can also call for impromptu meetings with the Chairman or any of the other Federal Reserve board of governors.
    • Reappointment process, the board of governors terms are only four years and can be reappointed for additional terms. Short and renewable terms facilitate accountability to the Executive and Senate which must approve these reappointments.
  2. To the public:

    • The minutes of federal reserve meetings are made public shortly after every assemble.
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    Of course, don't forget that there's a lot of informal influence. I.e. the Fed's chairman has kids and grandkids, all of whom want cushy jobs - and the President can make a lot of cushy jobs happen. Oct 24, 2023 at 21:03
  • @JonathanReez In a purely hypothetical conspiracy focused scenario the federal reserve has far more power and influence than any single member of the US government.
    – jesse_b
    Oct 25, 2023 at 13:07
  • @jesse_b it’s not really a conspiracy, it’s how corruption works in developed countries. No one gives you bribes but your kids get cushy positions or you yourself can expect one if you do what the right people tell you to do. Oct 25, 2023 at 13:10
  • @JonathanReez Right I don't disagree but it's not a provable thing so I'll just keep it hypothetical. Jerome Powell has more power than President Biden. CEOs would much rather bribe Powell to influence interest rates than Biden for whatever he can offer (almost nothing because checks and balances exist).
    – jesse_b
    Oct 25, 2023 at 13:11
  • And really the US government as a whole relies on the fed. Congress and the president need to kiss the ring of the fed to allow them to operate not the other way around.
    – jesse_b
    Oct 25, 2023 at 13:14
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Q: How can the U.S. government influence the Federal Reserve?

By passing a law stating the intended policy objectives and requiring reports for Congressional oversight.

Federal Reserve Reform Act of 1977

The Federal Reserve Reform Act of 1977 enacted a number of reforms to the Federal Reserve, making it more accountable for its actions on monetary and fiscal policy and tasking it with the goal to "promote maximum employment, production, and price stability". The act explicitly established price stability as a national policy goal for the first time. It also required quarterly reports to Congress "concerning the ranges of monetary and credit aggregates for the upcoming 12 months."

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