The power to create money out of thin air and to lend trillions of dollars is an awesome power. How is this power controlled?

The Fed has a seven-member Board of Governors, who are appointed by the president and confirmed by the Senate. Governors are appointed for 14-year terms and cannot be reappointed—this means a single president will rarely appoint a majority of the board. Once appointed, members of the Board of Governors cannot be easily fired. The chairperson of the Fed is appointed by the president from among the members of the Board of Governors and confirmed by the Senate for a term of four years. In addition, the Fed has to periodically report to overseers in both houses of Congress.

Although we say “the Fed,” the Fed is not just one bank but 12 Federal Reserve Banks, each headquartered in a different region of the country.* The regional structure of the Fed explains another peculiarity: The Fed is a quasi private, quasi public institution. Each regional bank is a nonprofit bank with nine directors: Six of these directors are elected by commercial banks from the region and three are elected by the Board of Governors. Six of the directors must be nonbankers and these are drawn from business, labor, academia, and other fields. In 2008, for example, the chairman of UPS was a director of the Atlanta Federal Reserve Bank, the president of Yarnell Ice Cream was a director of the St. Louis Federal Reserve Bank, and the head of the New York State AFL-CIO was a director of the New York Federal Reserve Bank. The directors of the regional banks appoint a regional bank president. Finally, the seven members of the Board of Governors, along with five rotating presidents of the regional Fed banks, make up the Federal Open Market Committee. The Federal Open Market Committee determines the stance of monetary policy by controlling open market policy. It is therefore the most important and influential part of the Fed system.

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Confused? Yes, it is confusing and we have spared you many of the details! Perhaps it will help to know that the confusing structure of the Federal Reserve system has a purpose. The Federal Reserve is powerful, so in keeping with the U.S. system of checks and balances, the power of the Fed is dispersed—no single president appoints all the governors of the Fed, the governors do not have complete control over Fed policy, the regional bank presidents come from all over the United States, and they are appointed by directors who are drawn not just from banking but from a wide variety of fields.

The bottom line is that the Federal Reserve is usually one of the most independent agencies in the U.S. government. It is relatively insulated from politics, party, and elections—perhaps only the Supreme Court is more independent. That said, in the financial crisis of 2008, the Fed had to work closely with the Treasury Department (for one thing, Treasury resources were required to recapitalize banks) and in that sense it was much less independent than usual. In general, the independence of the Federal Reserve worries some people who would prefer that the Fed be more directly accountable to democratically elected politicians. Other people are concerned that if the Federal Reserve could be controlled directly by, say, the president, this would give the president the power to order the Federal Reserve to expand the money supply and boost the economy just before an election.

Political pressures have been put on the Federal Reserve and some chairpersons have been less independent than others. In 1972, President Nixon asked Arthur Burns, the chair of the Fed, to stimulate the economy before the election. Burns did stimulate the economy and Nixon won in a landslide, but the economic gains were temporary. Not surprisingly, inflation was too high for the rest of the 1970s. This was not a proud moment in the history of the Federal Reserve or the presidency.

Overall, an independent Federal Reserve is defended by most economists as part of the U.S. system of checks and balances.