tiring every two years. If a governor should retire early, his successor takes over for what remains of his term. This system is intended to prevent a new occupant of the White House from packing the board with people of his political persuasion.
The Federal Reserve Board sets the discount rate, but the real policy-making body for the Federal reserve is the Federal Open Market Committee (FOMC), which fixes the federal-funds rate, or the rate at which banks lend to one another, and decides monetary growth targets. There are seven board members on the committee, each with one vote, plus the 12 presidents of the district Federal Reserve banks, only five of whom can vote at any one time. The president of the Federal Reserve Bank of New York has a permanent vote, while the remaining four votes are shared among the other presidents in rotation for one-year terms. The 12 are not chosen by the president but by private citizens on the boards of their banks, subject to the approval of the governors of the Federal Reserve (pp. 19-20).
As The Economist notes, this appears to be a very independent system, but analysts find ways in which the system can be manipulated for political purposes. The Federal Reserve is subject to changes in the law, for instance, and in recent years Congress has shown a desire to curtail the power of the Federal Reserve rather than to support it. A bill in 1989 tried to give the treasury secretary a place on the Federal Reserve Board and to allow a newly elected president to select his own chairman. Another try was made with a bill to remove the presidents of the district reserve banks from the FOMC, arguing that it is undemocratic for individuals who are not appointed by elected officials to make public decisions. Neither bill has passed to date, but both appear to be a threat to the independence of the Federal Reserve.
The issue involved is whether the Federal Reserve is democratically accountable. ...