Chapter 28, Problem 1SCQ

Why is it important for the members of the Board of Governors of the Federal Reserve to have longer terms in office than elected officials, like the President?

To determine

The reason behind longer appointment terms of the members of the Board of Governors of the Federal Reserve in comparison to the elected officials, like the Presidents.

Explanation of Solution

The Federal Reserve System (Central Bank of the USA) is actually a semi-decentralized organization managed by a mix of appointees, from private-sector banks as well as from the government. A Board of Governors comprising seven members appointed by the President of the USA and confirmed by the Senate runs “the Fed” on 14-year terms.

The reason behind such long and staggered appointment terms of the members of the Board of Governors is to isolate them from political pressure to the maximum extend possible. It helps the board in making unbiased policy decisions only based on their economic merits. Further, to insulate decision-making from politics during filling of an unfinished term, each member only serves one term. The Fed’s policy decisions do not require congressional approval, and unlike President, Federal Reserve Governor cannot resign with cabinet positions.

Economics Concept Introduction

Organization of the U.S. Federal Reserve: The Federal Reserve System is basically the central bank of the USA engaged in making decisions regarding money supply. It not only decides whether to lower or raise interest rates and, influence macroeconomic policy but also regulates the nation’s banking system to insure the health of the bank’s balance sheet and protect bank depositors. In USA, we call the central bank the Federal Reserve System often abbreviated as “the Fed.”