546546 Chapter 15 | Economic PolicyOne crucial characteristic of the Fed is its political independence, which has three
primary sources. First, the Fed is an independent agency: though the president and
Senate determine who sits on the board of the Fed, its decisions are not subject to
presidential or congressional review. Second, the 14-year terms for the governors
and the 4-year terms for the chair and vice-chair purposefully do not overlap with
the federal election calendar. One strong indication of the Fed’s independence is that
presidents typically reappoint chairs who were initially appointed by presidents of the
other party. For example, Ben Bernanke was nominated by Bush and renominated
by Obama for one term.^25 However, Trump broke that tradition by replacing Janet
Yellen with Jerome Powell. Unlike other presidential appointees in the bureaucracy,
members of the Federal Reserve Board can be removed only “for cause,” the precise
definition of which has never been tested. This largely insulates the Fed from the
political process.
Third, the Fed does not depend on Congress for its operating budget because it
can literally create its own money (as we will discuss later). Congress’s control of the
bureaucracy is rooted in the power of the purse (see Chapter 13), but because Congress
does not provide the Fed’s budget, Congress has much less leverage over it. The Fed’s
primary source of income is interest on the Treasury securities it owns. After paying for
all its expenses, the Fed returned about $81 billion to the Treasury in 2017. Overall, in
2017 the Fed employed 19,161 people with total salaries of $2.1 billion.^26 The employees
are not subject to civil service rules or pay grades; thus, the Fed can offer top salaries
and hire some of the best people in finance and economics.
Is the Fed’s independence a good thing or a bad thing? Supporters point out that the
Fed’s central goal is shared by nearly all politicians and Americans: a stable economy
and slow, steady growth (as mentioned earlier, the Fed has a dual mandate of pursuing
stable prices and maximum employment). Therefore, the argument goes, we should
leave the Fed alone, let it do its job, and keep politics out of monetary policy. However,
critics argue that the Fed’s lack of accountability means that it can do things that hurt
the economy—and voters have no recourse. For example, during Jerome Powell’s
confirmation hearing in 2017 senators grilled the nominee about the impact of the
Fed’s policies on the economy. Senator Sherrod Brown (D-OH) worried that the Fed
would ease up on enforcing regulations on big banks, saying, “Americans are stillU.S. Federal Reserve chair Jerome
Powell sits in front of a national debt
sign ahead of his first appearance
before a congressional panel to deliver
the Fed’s semi-annual report on
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