The Federal Reserve is one of the two most important central banks in the world, along with the Bank of Japan. As a central bank, it is charged with steering the monetary policies of the U.S. economy. There is considerable disagreement about the effectiveness of the Federal Reserve in pursuing this mission, and there are also different theories offered as to how a central bank can be structured best to be effective.
A comparison of the Bank of Japan and the Federal Reserve in The Economist ("The rewards of independence: central banks: America v. Japan," 1992, 19-21) notes first that studies have shown that when central banks are independent of political influence, they tend to deliver lower rates of inflation. They accomplish this without simply costing jobs, for countries with independent central banks do not, on average, have higher unemployment rates than others, with many having less. Under such systems, workers and employers adjust their wage-setting more readily to the climate of tight money because they believe that the policymakers have a commitment to low inflation. On the other hand, when politicians have a hand in setting monetary policy, they are always tempted to engineer a boom ahead of an election, and thus anti-inflation pledges lack credibility. Workers thus continue to demand high pay raises while bosses continue to concede them. The author concludes: "To make monetary policy credible, and hence more effective, it must be put in the hands of an independent central bank, insulated from political pressures" ("The rewards of independence: central banks: America v. Japan," 1992, 19).
On paper at least, the Federal Reserve is such an independent entity, though there are those who doubt that it is as politically insulated as it is supposed to be. The Federal Reserve is run by a board of seven governors appointed by the president. The chairman, also selected by the president, has a four-year, renewable te...