The Federal Reserve’s **independence in setting interest rates is real but not absolute.** While legally structured to be free from *direct political interference* in day-to-day monetary policy decisions, its independence operates within a complex framework of accountability, political influence, and practical constraints. Here’s a breakdown:

1. **Legal and Structural Independence:**
* **Appointments:** Fed Governors (including the Chair) are appointed by the President and confirmed by the Senate for **14-year terms** (Chair term is 4 years, renewable). These long, staggered terms are designed to insulate them from short-term political pressures.
* **Funding:** The Fed is self-funded through its own operations (interest on securities, fees for services), not through Congressional appropriations. This removes a major lever of political pressure.
* **Operational Autonomy:** The Federal Open Market Committee (FOMC) makes interest rate decisions **without requiring approval from the President or Congress.** They are not legally bound to follow administration directives.

2. **Sources of Constraint and Influence (Why it’s not 100% absolute):**
* **Congressional Mandate & Oversight:** Congress created the Fed and defined its **dual mandate** (maximum employment, stable prices). Congress can *change* this mandate or even restructure the Fed through legislation (though this is politically difficult). Fed officials regularly testify before Congress, facing intense scrutiny and pressure.
* **Presidential Influence:** While a President can’t *order* a rate change, they exert significant influence:
* **Appointments:** Choosing the Chair and Governors is a powerful long-term influence. Presidents appoint people generally aligned with their economic views (though often prioritizing stability and credibility).
* **Public Pressure:** Presidents can (and do) publicly criticize or praise Fed policy, attempting to sway opinion (e.g., Trump’s frequent criticisms, Biden’s public support for Powell’s independence while facing inflation).
* **Fiscal Policy Impact:** Massive government spending or tax changes (fiscal policy) directly impact the economy, constraining or influencing the Fed’s options.
* **Accountability & Transparency:** The Fed is highly accountable through:
* Regular press conferences, meeting minutes, economic projections.
* Congressional testimony (Humphrey-Hawkins hearings).
* Public scrutiny from markets, media, and academics.
This transparency, while promoting legitimacy, can also create pressure and influence decision-making indirectly.
* **Financial Market Pressures:** Global financial markets react instantly to Fed signals and decisions. The Fed must consider market stability and potential disruptions caused by its actions, which isn’t direct political pressure but is a powerful external constraint.
* **”Soft” Political Pressure:** Behind-the-scenes lobbying, leaks, and the constant awareness of political sentiment can subtly influence the environment in which decisions are made, even if not overtly dictating them.
* **Appointment Politics:** The process of nominating and confirming Fed officials is inherently political. Nominees are vetted for their views, and confirmation battles can be contentious.

3. **The Nuance: Independence vs. Infalibility vs. Isolation:**
* **Independence ≠ Always Right:** The Fed makes mistakes (e.g., underestimating inflation in 2021). Independence doesn’t guarantee perfect decisions, just freedom from direct political control.
* **Independence ≠ Isolation:** The Fed *must* consider the broader economic and political context. Ignoring the impact of fiscal policy or widespread public concern would be irresponsible, not independent.
* **”Instrument Independence” vs. “Goal Independence”:** The Fed has near-complete **instrument independence** (freedom to *choose how* to set interest rates to meet its goals). It does **not** have **goal independence**. Its goals (dual mandate) are set by Congress. It’s accountable *for achieving those goals*.

**Conclusion:**

The Fed is truthful in stating it has **operational independence** in selecting interest rates. No President or Congressperson can pick up the phone and demand a specific rate. Its structure is deliberately designed to shield monetary policy from the electoral cycle.

However, claiming “100% independence” oversimplifies reality. The Fed operates within a democratic system. It is:
* **Accountable** to Congress.
* **Influenced** by Presidential appointments and public pressure.
* **Constrained** by fiscal policy and market reactions.
* **Subject** to the political process for its leadership and mandate.

Therefore, while significantly and structurally independent in its *day-to-day interest rate decisions*, the Fed’s overall autonomy exists within a framework of democratic accountability and political influence. It’s more accurate to call it **”independent within government”** rather than completely isolated. Its independence is robust but operates within boundaries set by the political system it serves.

Is the same true of he Bank of England??  see next blog item.