Structure of central banks and the federal reserve system

Federal reserve banks:
12 Federal Reserve banks in 12 Federal Reserve districts
characteristics:
(1) quasi-public (part private, part government)
partly owned by the private commercial banks in the district who are members of the Federal Reserve system
(2) nine directors, chosen by member banks (6) and Board of Governors (3)
One president among nine directors

Member banks

Board of Governors of the Federal Reserve System
7 members, appointed by president and confirmed by the Senate

Federal Open Market Committee (FOMC)
meet eight times a year and makes decisions regarding the conduct of open market operations

A fair characterization of the Federal Reserve System as it has evolved is that it functions as a central bank, headquartered in Washington, D.C., which branches in 12 cities.

The independence of the Fed
(1) members are appointed for a 14-year term, which is not renewable
(2) independent and substantial source of revenue from its holdings of securities and from its loans to banks
(3) still subject to the influence of Congress because the legislation that structures it is written by Congress and is subject to the change at any time

The theory of bureaucratic behavior suggests that the objective of a bureaucracy is to maximize its own welfare.
(1) Fed has continually counterattacked congressional attempts to control its budget.
(2) Fed tries to avoid conflict with powerful groups that may threaten to curtail its power and reduce its autonomy.

The case fro an independent Fed rests on the view that curtailing the Fed's independence and subjecting it to more political pressures would impart an inflationary bias to monetary policy. An independent Fed can afford to take the long view and not respond to short-run problems that will result in expansionary monetary policy and a political business cycle.

The case againset an independent Fed holds that it is undemocratic to have monetary policy controlled by an elite that is not accountable to the public. An independent Fed also makes the coordination of monetary and fiscal policy difficult.