New Fed Chief Brief but Clear

1.Discuss the notion of Federal Reserve independence. Can you express a possible specific economic outcome if the Federal Reserve was not independent?

The independence of the Federal Reserve has long been a source of controversy among economic analysts. Opponents of an independent Fed say that it is undemocratic to have such a powerful policy-making ability in the hands of a group of people who are not elected by--and thus subject to--the will of the people. They argue that since the legislative and administrative branches of government are ultimately held responsible for economic growth and stability, these branches should have all the tools at their disposal to achieve their goals-including a cooperative Fed.

Proponents of Fed independence argue that the Fed must be free from political pressure if it is to effectively control the money supply and maintain price stability. Proponents' biggest fear is that citizens would place political pressure on the Fed to keep interest rates artificially low by increasing the money supply--even when it is necessary to raise interest rates and reduce aggregate demand to keep inflation in check. Defenders of the independent Fed also point out that countries with less central bank independence have historically had higher inflation than counties with more independence.

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