Question

How is the Federal Reserve accountable to the voters but at the same time insulated from short-term political pressures? Briefly discuss.

Answer 1

The Federal Reserve is supposed to be an apolitical organization whose chairman is appointed by the president. In day to day policy making, the Fed is not influenced by political pressures and is independent in its policy making. It is however instrumental in controlling monetary policy through interest rates and open market operations and so it is answerable to the public as these policies will determine the lives of the general public. The moment the Fed reduces interest rates it will mean the public can increase borrowing and there is increased money supply across the economy. This raises economic activity. The Fed is however not answerable to the President or to congress on a day to day basis. This makes it immune to any threats of re-election during the year. Thus the Fed determine the economic lives of people in the short term but is not subject to political pressures.