Explain two concepts of central bank independence. Is the Fed politica

Explain two concepts of central bank independence. Is the Fed politically independent? Why do economists think central bank independence is important?

What will be an ideal response?

ANSWER

Instrument independence is the ability of the central bank to set its instruments, and goal independence is the ability of a central bank to set its goals. The Fed enjoys both types of independence. The Fed is largely independent of political pressure due to its earnings and the conditions of appointment of the Board of Governors and its chairman. However, some political pressure can be applied through the threat or enactment of legislation affecting the Fed. Independence is important because there is some evidence that independent central banks pursue lower rates of inflation without harming overall economic performance.