Why The Federal Reserve Is Independent From The Three Branches Of Government

The Marriner S. Eccles Federal Reserve Board Building in Washington, D.C.

In any class involving American politics, the fundamental concept that comes up most often is checks and balances. Simply put, it’s the idea that no branch of the government, whether it be legislative, executive, or judicial, is left independent to do whatever they want. In other words, each branch will always face “checks” from the other two branches, ensuring, in turn, that the powers across the three branches remain “balanced” and no single body takes upon too much authority. For example, when the legislative branch passes a new bill, it has to be approved by the President—the executive branch—to officially become a law. However, to prevent the President from having complete control over which bills get passed into law and which don’t, the legislative branch can override presidential vetoes by getting a two-thirds supermajority vote.

This system of checks and balances is quite robust, but there is one specific part of the American government that is intentionally left out, at least for the most part: the Federal Reserve, or as most people call it, the Fed. Although the Fed isn’t one of the three big branches, it plays a role that is just as important, as it controls the nation’s money supply, banking rules, and overall economy. One of the most striking features of the Fed is that it independently makes decisions with no direct control, input, or “checks” from the President, Congress, and the courts. The traditional three branches of government really only come into play in the Fed for nominating board members, confirming them, and reviewing legal issues. Many people question why the Fed is left independent, and while the answer may be obvious to some, it’s still important to look at the specifics and the history behind the Federal Reserve. In 1913, Congress created the Fed with the Federal Reserve Act to ensure decisions on interest rates, prices, and jobs came from economic data rather than political needs. If the Fed wasn’t independent, it might simply lower rates to help a president look good before an election, which could cause inflation or debt buildup later. By giving the Fed independence, it can respond to slowdowns or rising prices solely based on reports from jobs data and bank health. 

The push for an independent Fed started in the early 1900s when the U.S. faced banking troubles without a central authority. Banks opened up fast, but they usually lacked solid funds. Because of this, when confidence dropped, people didn’t hesitate to pull out their savings, and when thousands of customers showed up at the same time to withdraw, many banks couldn’t scrape together sufficient funds, shutting them down permanently. The Panic of 1907, for instance, hit hard, with stock falls and business halts that needed private fixes from figures like J.P. Morgan. It marked a turning point that showed that the U.S. was in dire need of a steady, centralized banking system. Congress debated for years, taking into account the ideas of top bankers from cities, struggling farmers in the Midwest who feared big government or Wall Street control, and everyone in between. Eventually, they decided that it would be best to integrate a mix of ideas from these different populations. On December 23, 1913, the Federal Reserve Act was signed by President Woodrow Wilson, and the law went live in 1914. The act made the Fed an independent body that did not need any input or approval from the three main branches for making decisions. A look at past panics showed how many jobs and livelihoods slow responses cost, so the design of the Fed focused on acting quickly.

The way that the Fed is organized makes independence possible in its daily work. The Federal Reserve Board of Governors, consisting of seven members in Washington, D.C., leads the system, with the President nominating them and the Senate confirming them after hearings on their economic ideas. Governors’ terms last for 14 years, and every four years, the board chooses a chair and vice chair on its own. Jerome Powell became chair in 2018 after being approved by the Senate, and since then, he has been responsible for running meetings for setting interest rates and making use of other monetary policy tools. There are also 12 regional banks, from Boston to San Francisco, to look at things from local viewpoints. They have presidents, who meet eight times a year to handle bond purchases that shift cash in the economy. Member banks own stock in these regions, giving private links, but policy stays with the Fed’s Board of Governors. This blend pulls data from coast to coast, so choices reflect broad needs, not just one area’s push or a lawmaker’s call.

A map of the twelve Federal Reserve Regional Banks throughout the United States (via federalreserve.org).

The three branches offer some checks on the Fed, but they are nowhere as much as the three branches do on each other. Congress can technically alter the Federal Reserve Act since they created it, but they rarely make any changes to it because they risk market shakes, dollar doubts, and even a collapse of the financial system. Every six months, the Fed sends Congress reports that detail growth plans, job targets, and goals to keep inflation at two percent. The chair testifies before House and Senate committees and answers questions on interest rates and bank tests, among many other topics. These talks enable the public and lawmakers to voice their concerns. The President picks board members but can only remove them for causes like breaking the law, not policy clashes. Courts handle suits on legal errors, but they leave policy to the Fed. This minor oversight and relative lack of checks and balances keeps the Fed loosely linked to the government while also ensuring unbiased decisions and making it publicly accountable.

Monetary policy shows why independence fits the job so well. The Fed sets the federal funds rate, the cost banks charge for overnight cash, and it flows to everyday loans for homes or cars. To fight high prices, the Fed raises the interest rate so that putting money into savings pays more. When this happens, people start saving more and buying slows down, easing demand on goods and lowering prices. When unemployment starts going up, the Fed cuts interest rates to make credit cheap, allowing for businesses to take out more loans, hire extra staff, and increase output. The decisions to raise, maintain, or cut interest rates come from long-range data, not weekly news. Elected leaders often want lower interest rates because it temporarily enables a more productive economy, which means their public image will be better. However, it risks bubbles, as we saw during the 1970s, when presidents pushed the Fed for low rates despite spikes in oil prices. This drove inflation up to 13 percent and shrank what people’s money could buy. Paul Volcker, chair of the Fed at the time, stepped in and raised rates to 20 percent, a move that caused short-term pain but brought long-term calm. The Fed’s independence helps it resist those kinds of pressures and focus on its dual mandate from the 1977 law, which calls for stable prices and maximum employment.

The Great Depression is an infamous example that highlights what happens when the Fed isn’t free to be independent. The Fed, new in 1914, faced the 1929 crash but held back aid to banks over fears of political blame in a split government. The amount of money in the banking system shrank by a third, banks closed, and unemployment reached 25 percent. Later analysis by economists like Milton Friedman tied the delay to weak buffers against politics. Congress fixed it with the 1935 Banking Act, which gave the board more say and longer terms. That shift helped during future hits like the 2008 Financial Crisis, when unregulated home loans froze credit and dropped stocks. Ben Bernanke, the Fed’s chair, cut interest rates to zero percent, bought $4 trillion in bonds for cash flow, and gave out loans to banks. Congress added bailouts, but the Fed drove the money side. These quick actions trimmed the recession to 18 months. Studies from Brookings link such independent steps to lower long-term inflation and faster pulls from slumps.

In the end, apart from a few exceptions, the Federal Reserve remains mostly free of the checks and balances system present in the main legislative, executive, and judicial branches. The Fed is independent primarily to prevent it from making decisions that are politically motivated and biased, which could potentially hurt the economy. While the Fed’s independence and complete control over monetary policy have raised some concerns, it’s very important that it remains as distant from politics as possible.