Central bank independence and the Federal Reserve's new operating regime (2024)

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Q Rev Econ Finance. 2020 Oct 14

doi:10.1016/j.qref.2020.10.006 [Epub ahead of print]

PMCID: PMC7554479

PMID: 33071531

Jerry L. Jordan^a and William J. Luther^b,^⁎

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Highlights

•
The Federal Reserve adopted a new operating regime in October 2008.
•
The new operating regime increased the appointment power of the President.
•
The new operating regime improved the bargaining power of Congress.
•
The new regime exposes the Fed to a greater degree of political influence.

Keywords: Central bank, Central bank independence, Federal Reserve, Monetary policy, Political economy

Abstract

The Federal Reserve is exposed to a greater degree of political influence under its new operating regime. We survey the relevant literature and describe the Fed's new operating regime. Then we explain how the regime change reduced de facto central bank independence. In brief, the regime change increased the appointment power of the President and improved the bargaining power of Congress. We offer some suggestions for bolstering de facto independence at the Fed.

Keywords: Central bank, Central bank independence, Federal Reserve, Monetary policy, Political economy

In just four years, President Trump had the ability to make no fewer than five appointments to the Federal Reserve's seven-member Board of Governors. Political gridlock prevented the previous administration from filling two vacancies. The resignations of Daniel Tarrulo in April 2017 and Stanley Fischer in October 2017 created two more. Janet Yellen's decision to resign, following her replacement as Chair by Jerome Powell in February 2018, opened a fifth spot. With so many appointments available, some expressed concern that the President might reshape the Fed to his advantage—reviving old questions about central bank independence in the process.¹

While the Fed is nominally independent (i.e., it is not an agency of the federal executive departments nor the Executive Office of the President), it is nonetheless subject to political pressure.²The appointment process provides one channel through which monetary policy might be influenced. Congressional oversight offers another. The Fed is not even independent in a comparative sense. The United States ranks in the bottom quartile of countries on several measures of central bank independence.³

We argue that, despite leaving de jure independence unchanged, the Fed's new operating regime exposes the central bank to a greater degree of political influence. In what follows, we survey the literature and describe the Fed's new operating regime. Then we explain how the regime change reduced de facto central bank independence. In brief, the regime change increased the appointment power of the President and improved the bargaining power of Congress. Finally, we offer some suggestions for bolstering de facto independence at the Fed.

1. Independence and the Fed

At least since Cukierman (1992), most economists have recognized the importance of central bank independence for safeguarding monetary policy from short-term political pressure.⁴But one must be careful not to confuse the desirable with the factual.⁵The Federal Reserve is not immune to political pressure (). Indeed, it is less independent than most other central banks. Dincer and Eichengreen (2014) present four indices of central bank independence for eighty-nine countries in 2010.⁶Depending on the measure employed, the United States ranked 82nd (tie), 83rd (tie), 84th (tie), or 87th. Garriga (2016) offers two additional measures of central bank independence. Out of one hundred seventy-nine countries observed in 2012, the United States ranked 136th or 158th. The Fed, in other words, does not appear to be very independent.

Anecdotal evidence serves to illustrate the potential for political influence at the Fed.⁷It is widely accepted that an incumbent President's odds of reelection suffer when the unemployment rate is high (Abrams, 1980; ; ; ; Erikson, 1989; Fair, 1996). It is also widely believed that President Nixon conspired with Federal Reserve Chair Arthur Burns to exploit that relationship.⁸As Abrams (2006, 178) reports, “Evidence from the Nixon tapes [...] clearly reveals that President Nixon pressured Burns, both directly and indirectly through Office of Management and Budget Director George Shultz, to engage in expansionary monetary policies prior to the 1972 election.”⁹The pressure seems to have worked. Burns obliged.¹⁰Nixon was reelected. And the rest, as they say, is history.

More generally, economists have identified two channels through which short-term politics might influence the Fed's monetary policy decisions. The first is a product of the appointment process. Members of the Board of Governors (BOG), including the Chair and Vice Chair, are nominated by the President of the United States and confirmed by the U.S. Senate. Governors are permitted to serve one full 14-year term. However, those appointed to complete the balance of a term may be reappointed for a full term. From among the Governors, the President selects—and Senate confirms—a Chair and Vice Chair. The Chair and Vice Chair serve four-year terms and may be reappointed and serve until their term as Governor expires.

A Governor cannot be removed from the Board for his policy views. But he can be selected based on his policy views.¹¹And, if he was appointed to complete the balance of a term, his reappointment might depend on policies supported while serving. Likewise, a Chair or Vice Chair might fail to secure reappointment based on her policy views. In this case, she would either serve out the remainder of her term as a mere Governor or, more typically, resign (Abrams, 2006).¹²As such, the appointment process opens the door for political influence.

How important is the appointment process? The BOG accounts for seven of the twelve votes cast in Federal Open Market Committee (FOMC) meetings, where the federal funds rate target is chosen.¹³Puckett (1984) shows that Governors dissent in predictable ways given the party of the President who appointed them.¹⁴Abrams and Iossifov (2006) find that Fed policy is more likely to be expansionary in the seven quarters prior to an election if the Fed Chair was appointed by the incumbent President's party. Perhaps this explains why, in the last fifty years, no President has failed to reappoint a Fed Chair appointed by a President of his own party.¹⁵

Short-term politics might also influence monetary policy through a second channel, which results from congressional oversight.¹⁶The Federal Reserve was created by an act of Congress. Congress might amend that act to provide for policy audits or otherwise limit the Fed's discretionary powers.¹⁷At the very least, the Fed Chair might be harangued by members of the Committee on Banking, Housing, and Urban Affairs of the Senate or the Committee on Financial Services to the House of Representatives while giving oral testimony regarding the semi-annual Monetary Policy Report to the Congress. Although one might hope members of Congress would use these powers to ensure Fed officials act in the best interest of society, they might just as easily use these powers for their own, short-term political benefit.

The interaction between Fed and Congress has traditionally been considered in the context of budgetary policy ([Shughart and Tollison, 1983], [Toma, 1982]).¹⁸In brief, the Fed must decide how much of its revenues to spend and how much to remit to the Treasury in an environment where monitoring is costly. If it remits too much, it forgoes additional personnel and other amenities that would improve working conditions at the Fed. If it remits too little, it risks losing the discretion that enables it to make such decisions in the future. Hence, the Fed's objective function is constrained by congressional oversight.

2. New operating regime

Many financial market commentators and some economists at the time failed to recognize that the Fed changed its operating regime in October 2008. Those observers were correspondingly puzzled when the large scale asset purchases that followed failed to boost nominal spending. In hindsight, that puzzle is easily solved. The Fed had abandoned its traditional operating regime, neutralizing open market operations in the process. But, at the time, it was not so obvious.

Prior to October 2008, the Fed conducted monetary policy via a corridor system (Williamson, 2019). A corridor system prevails when the Fed sets its federal funds rate target (FFR) below the discount rate (DR) and above the interest rate paid to banks on reserves held at the Fed (IOR). Then, the Fed conducts open market operations to push the effective federal funds rate (EFFR) toward its target. The EFFR is not an administered rate. Rather, it is the volume-weighted median rate on overnight federal funds transactions taking place between financial institutions. The Fed influences theses rates—and, hence, the EFFR—by making federal funds more or less scarce through its open market operations (Hummel, 2017).

In October 2008, the Federal Reserve moved from a corridor system to a floor system. A floor system prevails when the Fed sets the FFR at or below IOR. Although open market operations might still be used to increase or decrease the supply of reserves, the supply of reserves no longer affects the EFFR.¹⁹The logic is straightforward. If a financial institution earns at least as much by holding reserves at the Fed as it would by lending those reserves to another institution, it will opt to hold any amount of reserves available. Open market operations will change the quantity of reserves institutions hold, but not the EFFR, since no institution lends any of the federal funds they acquire. In a floor system, the Fed influences the EFFR—or, more precisely, the unobserved bids and asks in the federal funds market—by adjusting the IOR.²⁰

It is worth considering, if only briefly, why the Fed changed its operating regime.²¹In an effort to prevent the financial system from collapsing, the Fed increased its lending to financial institutions beginning in January 2008. In July 2008, it also increased its lending to key credit markets. On its own, such lending would cause the Fed's balance sheet to grow and, in time, the price level to rise. However, the Fed offset this lending by selling Treasuries, thereby keeping a lid on inflation.

In September 2008, the Fed embarked on a massive lending program. Its loans to financial institutions would increase from around $550.1 billion in early September to $1571.2 billion by mid-November. Its loans to key credit markets would increase from $29.2 billion to $362.4 billion over the same period. But the Fed no longer held sufficient Treasuries to offset its expenditures. It would not be able to maintain the size of its balance sheet and engage in the lending and other asset purchases it thought necessary.

Fearing inflation, and committed to increasing its balance sheet, the Fed adopted a policy of paying interest on reserves. Congress had authorized the Fed to pay interest on reserves as early as October 1, 2011 when it passed the Financial Services Regulatory Relief Act of 2006.²²With the passing of the Emergency Economic Stabilization Act of 2008, the effective date was moved up by three years. The Fed began paying interest on reserves on October 6, 2008.

The move from corridor to floor system enabled the Fed to significantly expand its balance sheet without the usual inflationary pressure that would accompany large scale asset purchases (, 2018a).²³Subsequent rounds of so-called quantitative easing would see the Fed's balance sheet increase by 395.5%, from $905.3 billion in September 2008 to $4486.2 billion in December 2014.²⁴The Personal Consumption Expenditures: Chain-type Price Index (PCEPI) increased by less than 8% over the same period; and year-on-year PCEPI inflation exceeded 2% in just nineteen of seventy-five months.

3. Implications for independence

While the Fed has lacked a high degree of de jure independence since its founding, it appears to have enjoyed a high degree of de facto independence—at least during the period widely known as the Great Moderation.²⁵Its new operating regime, adopted in October 2008, has reduced the Fed's de facto independence though, despite leaving its de jure independence unchanged.²⁶Indeed, the new regime reduces de facto independence through both channels identified in Section 1. Specifically, the new operating regime has increased both the appointment power of the President and the bargaining power of Congress. The Fed is exposed to a greater degree of political influence as a result.

The appointment power of the President is greater under the new operating regime because appointees carry more weight in the monetary policy decision making process. Recall that, in a corridor system, monetary policy is conducted by setting the FFR and engaging in open market operations to influence the EFFR. In a floor system, monetary policy is conducted by setting the IOR. The FFR is set by the twelve voting members of the FOMC. IOR is set by the seven members of the BOG. Hence, the move from corridor to floor system reduced the set of relevant decision makers and, correspondingly, increased the power of each appointment.

In fact, the reduction in de facto independence through the appointments channel is even greater than implied above. Recall that the FOMC consists of seven members of the BOG and five regional Reserve Bank Presidents. Unlike members of the BOG, who are appointed by the President and confirmed by the Senate, regional Reserve Bank Presidents are appointed by their regional Reserve Bank's Board of Directors and confirmed by the BOG. Hence, the new operating regime reduced the set of relevant decision makers by disenfranchising those furthest removed from political influence.

One might be reluctant to believe the BOG would ever take advantage of its IOR-setting power to influence monetary policy. Doing so would require choosing an IOR inconsistent with the FFR, which would place BOG members in the awkward position of having to explain why the Fed is failing to hit its FFR. Indeed, the BOG maintains that it sets the IOR in consultation with the full FOMC. And, at least to date, the BOG has set the IOR in a manner consistent with FOMC decisions.

There is, however, a precedent for using administered rates to override FOMC decisions. Belongia (2009) explains how “Greenspan hijacked monetary policy in the late 1980s and early 1990s from the FOMC” with the BOG's discount rate-setting power. Specifically, when discussions at the Tuesday FOMC meeting made it clear he lacked the requisite votes to reduce the FFR, Greenspan would allow the FOMC to “vote for ‘no change’ in the funds rate.” Then, on the recommendation of a single Reserve Bank President, he would propose cutting the discount rate at the BOG's Friday meeting. With the motion carried by the BOG, Greenspan would then instruct the open market desk to execute “a ‘pass-through’ change in the funds rate for ‘technical reasons.’” It is, therefore, not unreasonable to think the BOG might similarly use its IOR-setting power if ever its members find themselves in the minority of the FOMC.

That the BOG has conducted monetary policy in line with FOMC decisions to date does not negate our position. For starters, it does not imply the BOG will continue to do so. Furthermore, since the FOMC now sets a FFR range, the BOG has some scope to influence monetary policy without formally overriding FOMC decisions. Chair Powell has described changes to IOR within the FFR range as “small technical adjustments,” but they arguably permit the BOG to tweak the stance of monetary policy on the margin. One need not believe that the Fed's new operating regime strips regional Reserve Bank Presidents of all power to conduct monetary policy. To the extent that it shifts any power from regional Reserve Bank Presidents to members of the BOG, the new operating regime increases the appointment power of the President.

De facto central bank independence is also lower under the new operating regime because of the greater bargaining power it affords to Congress. In brief, the new operating regime gives Congress political ammunition to use against the Fed and eliminates the Fed's primary objection to conducting fiscal policy on behalf of Congress. We discuss each in turn.

The Fed's new operating regime requires paying a premium rate of interest to banks holding reserves in order to keep those reserves sequestered. Some reserve-holding institutions are not banks and, as such, are ineligible for IOR payments. However, these non-bank institutions can lend their reserves to a bank in exchange for a share of the IOR the borrowing bank will then receive from the Fed. Transaction and information costs tend to make larger banks more attractive from the lending institution's perspective. Moreover, since foreign financial institutions with U.S. branches and agencies are eligible for IOR payments but do not pay Federal Deposit Insurance Corporation (FDIC) premiums, they are typically willing to pay more to secure federal funds for arbitrage operations. As a result, most of the reserves end up being held by large domestic banks and foreign financial institutions. Fig. 1, which depicts the estimated weekly total reserves from January 2004 to December 2018 of foreign-related institutions, large domestically chartered commercial banks, and small domestically chartered commercial banks as defined in the Board of Governors of the Federal Reserve System's H.8 release, confirms as much.²⁷And, since large banks and foreign financial institutions hold most of the reserves under the Fed's new operating regime, large banks and foreign financial institutions receive most of the IOR payments.²⁸

Open in a separate window

Fig. 1

Estimated Total Reserves, Billions of U.S. Dollars, Weekly, Seasonally Adjusted, January 2004–December 2018.

The Fed's policy of paying IOR affects its remittances to the Treasury in two ways. The direct effect of the policy is to reduce the amount it remits. When the Fed pays more to large banks and foreign financial institutions, it has less to remit to the Treasury. But there is also an indirect effect. By paying IOR, the Fed is able to maintain a much larger (and, arguably, riskier) balance sheet, which results in correspondingly larger revenues. This indirect effect enables the Fed to increase its remittances to the Treasury. To date, the indirect effect has dominated. Annual remittances from the Fed to the Treasury have been significantly greater in recent years. But the direct effect is much more salient than the indirect effect. As a result, the Fed's policy of paying IOR might easily be construed as making transfers from the American taxpayer to large banks and foreign financial institutions.

Large banks and foreign financial institutions are easily vilified—and members of Congress are not above exploiting that fact. Specifically, Congress might cite interest payments made by the Fed to such firms in an effort to reduce the Fed's discretionary power at a lower cost of political capital than was previously possible. Hence, even if one believes the Fed's new operating regime is a technical improvement over the previous regime, the fact that large banks and foreign financial institutions appear to benefit at the expense of taxpayers provides political ammunition to Congress.²⁹

Perhaps most significantly, the Fed's new operating regime eliminates its primary objection to conducting fiscal policy on behalf of Congress. “Once the demand for reserves is satiated,” Plosser (2020) writes, “there is no limit, in principle, to how big the balance sheet or volume of reserves can be. A large balance sheet unconstrained by monetary policy is ripe for abuse. Congress and an administration would be tempted to look to the balance sheet for their own purposes, including credit policy and off-budget fiscal policy.”³⁰And, when they do so, the Fed will be unable to push back on the grounds that conducting fiscal policy would undermine its ability to maintain price stability. Plosser (2020) cites two early examples: the funding of the Consumer Financial Protection Bureau and partial funding of a 2015 transportation bill. More recently, in response to the COVID-19 pandemic, Congress has instructed the Fed to engage in “up to $2.3 trillion in lending to support households, employers, financial markets, and state and local governments” ().

In adopting its new operating regime, the Fed has exposed itself to a greater degree of political influence. By reducing the set of decision makers to the BOG, the transition to a floor system increased the appointment power of the President. By giving Congress political ammunition to use against the Fed and eliminating the Fed's primary objection to conducting fiscal policy on behalf of Congress, the new regime has increased the bargaining power of Congress. Hence, through both channels previously identified in the literature, the Fed's regime change reduced de facto central bank independence.

4. Conclusion

Although the Fed is often billed as an independent agency, it is nonetheless subject to political pressure. The appointments process and congressional oversight provide two channels through which monetary policy might be influenced by short-term politics. And its new operating regime, whereby monetary policy is conducted by adjusting IOR, is marked by less de facto independence than the preceding regime through both channels.

An obvious solution to restoring the Fed's independence would be to return to a corridor system, where decisions are made by the FOMC, the Fed does not make sizable interest payments to large banks and foreign financial institutions, and traditional arguments against using the monetary authority to conduct fiscal policy hold. Short of that, there are several partial measures the Fed might take. For one, it could modify its rules such that all FOMC members are involved in the IOR rate-setting decision. The Fed might also improve its communications to the public with respect to the broader benefits of paying interest on reserves and the desirability of limiting it to the conduct of monetary policy. Although none of these measures will make the Fed truly independent, they would go a long way toward restoring the level of de facto central bank independence enjoyed in the past.

Declarations of interest

None declared.

Footnotes

^☆Kevin Grier, George Selgin, and seminar participants at the American Enterprise Institute and American Institute for Economic Research provided valuable comments on an earlier draft of this paper. Any remaining errors should be attributed to the authors.

¹Three of President Trump's appointments—Randy Quarles, Richard Clarida (Vice Chair), and Michelle Bowman—have been confirmed by the U.S. Senate. Two others, Judy Shelton and Christopher Waller, currently await confirmation.

²Jeong, Miller, and Sobel (2009) argue that the Fed's structural independence was unintentional, resulting from a compromise among disparate groups represented in the U.S. Congress.

³We discuss six measures below. See: ; ; Garriga, 2016.

⁴Earlier works include Alesina (1988, 1989), Bade and Parkin (1982), Grilli, Masciandaro, and Tabellini (1991). M. Parkin. (2013) provides a recent summary and assessment. McCallum (1997) offers an alternative view.

⁵Conti-Brown (2017) questions the desirability of independence on the grounds that Fed decision makers should be accountable to democratically-elected officials. White (2010), in contrast, argues that the “rule of law in monetary institutions is served neither by following the legislature's discretion nor the central bankers’ discretion. [...] The key to stability is not the independence,” he writes, “but the restraint of central bank money and credit creation.”

⁶Two of the four indices are constructed along the lines of Cukierman (1992).

⁷Meltzer (2013) provides a brief history of the Fed with central bank independence in mind.

⁸Nixon is by no means the first president to take the Fed's independence lightly. For example, Bremner (2008) reports that Lydon B. Johnson asked Attorney General Nicholas Katzenbach whether he could legally remove William McChesney Martin from office. Katzenbach advised against it, on the grounds that policy differences were insufficient cause for termination.

⁹Although Nixon was aware that the conversations were being recorded, Abrams (2006, 178) notes that “his remarks are remarkably forthright, as though he had forgotten that the tapes were running.”

¹⁰In a personal diary, since published, Burns admits he was pressured by members of the administration, but thought they did not understand monetary policy (Ferrell, 2010). He also repeatedly advocated for price controls and incomes policies on the grounds that inflation could not be tamed through monetary policy (Ferrell, 2010, pp. 40, 94, 98, 103). Selgin (2010), in contrast, describes Burns's Per Jacobson lecture on the “Anguish of Central Banking” as “an admission that the Fed was quite incapable of performing its most fundamental task, and that the problem was, not any lack of material means on the Fed's part, but simply the will to do what needed doing given political incentives then at play.”

¹¹Salter and Luther (2019) consider the effects of this selection mechanism.

¹²It seems reasonable to think the Chair and Vice Chair are more important than other positions on the Board. They are more likely to set the agenda or establish a focal point in policy meetings and their public statements appear to carry more weight. Indeed, Kane (1988) limits his attention to the Chair in considering the President's appointment decision. See also: Beck (1987)

¹³Other members include the President of the Federal Reserve Bank of New York and four of the remaining regional Reserve Bank Presidents.

¹⁴According to Chappell, Havrilesky, and McGregor (1993) the appointments process–rather than direct pressure from the President–is the primary mechanism through which partisan differences in monetary policies arise.

¹⁵Given his initial appointment by President Obama, Jerome Powell's elevation to Chair by President Trump might seem to conflict with this view. However, it is widely believed that Powell was initially appointed as part of a compromise whereby Senate Republicans got Powell on the Board in exchange for confirming Jeremy Stein, whose nomination had previously been filibustered.

¹⁶As is widely appreciated in the political science literature, oversight might take the form direct examination (police-patrol) or indirect processes and procedures (fire-alarm). See: Balla and Deering (2013), Lupia and McCubbins (1994), McCubbins and Schwartz (1984).

¹⁷Indeed, the Federal Reserve Act has been amended many times. For example, Section 217 of Public Law No: 115-174, passed in May 2018, lowered the maximum allowable amount of surplus funds of the Federal Reserve banks.

¹⁸See also: Allen, McCrickard, Cartwright, and Delorme (1988), Boyd (1984), Strong (1984).

¹⁹More precisely, Ennis (2018) shows that changes in the supply of reserves do not yield the traditional response in a floor system unless the quantity of reserves is large enough to make capital constraints binding.

²⁰Technically, the new operating regime is a leaky floor system. Since some institutions, like government sponsored enterprises, are ineligible for IOR payments, they lend federal funds to eligible institutions at a rate below IOR in an act of arbitrage. The Fed sets a rate on overnight reverse repurchase agreements to create a subfloor in the federal funds market (Williamson, 2016).

²¹For a more complete account, see Selgin (2018).

²²Ireland (2019) considers the rationale of paying interest on reserves.

²³Correspondingly, Dutkowsky and VanHoose (2018b) argue that the Fed could unwind its balance sheet with little consequence, so long as its FFR and IOR are set such that banks continue to operate as they have in the post-October 2008 regime. See also: Feldstein (2018), Selgin (2019).

²⁴White (2016) and Burns and White (2019) examine the Fed's move from general monetary policy to the specific allocation of credit. See also: Lacker (2012), Meltzer (2012).

²⁵The Great Moderation is usually dated from the mid-1980s until 2007.

²⁶Dutkowsky and VanHoose (2020) suggest that the Fed might have entered a “third regime” in June 2018, where “banks simultaneously choose to hold positive levels of excess reserves and engage in interbank lending.” It is too early to tell whether the Fed will remain in the third regime, if it has in fact transitioned, or revert to a more conventional floor system. However, the third regime is sufficiently similar to a conventional floor system so as not to invalidate the more general argument regarding de facto central bank independence presented herein.

²⁷Our estimate of total reserves includes vault cash, cash items in process of collection, balances due from depository institutions, and balances due from Federal Reserve Banks. Craig, Millington, and Zito (2015) maintains that cash holdings are a reasonable proxy for total reserves.

²⁸Keating and Macchiavelli (2017) find that U.S. branches and agencies of foreign banks capture much of the arbitrage business made possible by the floor system. Large domestic institutions also gain, while the pass-through from unsecured borrowing to reserve balances for small domestic banks is not significantly different from zero.

²⁹Of course, many reject the notion that the Fed's new operating regime amounts to a technical improvement. Beckworth (2018), for example, maintains that paying IOR tends to produce tight monetary policy. See also: Hogan (2018).

³⁰Selgin (2020) refers to such efforts as “fiscal QE” and traces the history of the idea.

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Central bank independence and the Federal Reserve's new operating regime (2024)

FAQs

What are the main arguments for central bank independence? ›

It also found that greater independence was associated with much better inflation outcomes. The bottom line is clear: central bank independence matters for price stability—and price stability matters for consistent long-term growth. But to wield enormous power in democratic societies, trust is key.

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What is a central banking system created to regulate the _____________ supply and _____________ rates? ›

The U.S. central banking system—the Federal Reserve, or the Fed—is the most powerful economic institution in the United States, perhaps the world. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.

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What are the arguments for a Federal Reserve bank operating independently? ›

What are the main arguments for the Fed's independence? An independent Fed makes a political business cycle less likely.

Is the Fed politically independent Why do economists think central bank independence is important? ›

Is the Fed politically independent? Why do economists think central bank independence is important? The Fed is politically independent since the monetary decisions of the the Fed do not have to be ratified by the President or anyone in the Executive Branch.

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What are the two concepts of central bank independence? ›

The two most important dimensions of independence are 'political independence' and 'economic independence,' commonly called 'goal instrument' and 'instrumental independence. ' 1. Goal independence: gives the right to the central bank to find out policy goals without any intervention of fiscal authority.

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What is the central bank independence theory? ›

Abstract. Central bank independence refers to the freedom of monetary policymakers from direct political or governmental influence in the conduct of policy.

What is the strongest argument for an independent Federal Reserve? ›

Question: The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart an inflationary bias to monetary policy. adeflationary bias to monetary policy.