While many people outside the United States know its Independence Day falls on July 4, not many even in America know that March 4 serves as the Independence Day of the Federal Reserve (the Fed), independence in the sense of its own monetary policies not interfered with by the Treasury Department and even the president of the United States.
Readers following the financial market and/or U.S. politics are well aware of U.S. President Donald Trump’s constant outcries on Twitter expressing his disagreements on interest rate policies with the Fed. The Federal Reserve, however, have continued to raise interest rates, much to the dislike and even anger of President Trump.
The independent role of the Fed has not always been in place from the beginning. During World War II, then U.S. presidents Franklin Roosevelt and Harry Truman asked for lower interest rates from the Federal Reserve to finance war expenses at a low cost, the Fed duly cooperated.
Following the postwar economic expansion, however, the Federal Reserve saw it imperative to enforce harsh interest rate policies on its own to effectively curb inflation rising over 20 percent annually at one time. After negotiations with the White House, on March 4, 1951, the Treasury Department entered into an accord with the Federal Reserve, allowing the latter to have sole discretion on monetary policies.
The practice has been followed since, but not without unpleasant encounters with U.S. presidents. President Lyndon Johnson even literally pushed then Fed chairman to the wall, yelling out his anger after the Fed raised the interest rate to his disagreement. On another case, farmers used heavy tractors to block the entrance of the Fed building to vent their disgruntlement. Despite all these disturbances, the Fed has stood up to its own policy decisions since 1951.
The rationale for its independent decision-making lies in the fact that the Fed is entrusted with obligations to ensure the soundness and stability of the U.S. financial system in the long run, setting up interest rates being one of its tools, whist U.S. presidents are often enticed to use financial measures to swing for short-term gains. Even though Fed chairmen are appointed by presidents, they have been carrying out duties based on their independent professional judgment.
Letting professionals do their jobs is easier said than done. The basketball industry has been yielding great results since Yao Ming assumed the role of the chairpersons of the China Basketball Association, but that is the topic for another day.
(The author is an independent financial investor and freelance writer.)