Scott Horsley

It has some regulatory functions overseeing banks in the country.

But the thing that most people know the Fed for is that it adjusts interest rates either up or down in an effort to promote maximum employment and stable prices.

That is, it's trying to fight unemployment and inflation.

The Federal Reserve raises interest rates when they get nervous that inflation is too high.

They tend to lower interest rates when they're worried that unemployment is rising, and it's a way to goose the economy.

And in setting up this institution, Congress deliberately created the Fed to be independent of political pressure from the White House.

Right.

So in general, elected politicians would prefer to have interest rates low to kind of goose the economy before the next election and have people feeling good about where things are and make it cheaper for people, families and businesses to borrow money.

But that can have long-term adverse consequences.

It can lead to more inflation in the long run.

So sometimes the Fed, in doing what's in the long-term interest of the economy, has to make decisions that are unpopular in the short term, like keeping interest rates high to counteract inflation.

And so experience not only in this country but around the world has shown that it's best to put a little bit of distance between elected politicians who always want to do what's best in the short run or who usually want to do what's best in the short run so that the Fed can make decisions that are best in the best interest of the economy in the long run.

And we talk about that as Fed independence.

It doesn't mean that they're completely untethered to the political system.

The Fed has to answer to Congress.

The Fed chairman goes before congressional committees twice a year and has to issue reports and so forth.

But they're not supposed to basically take instructions from the White House.

That's right.

So the Federal Reserve is in the midst of a big renovation of its headquarters building here in Washington, and there have been some significant cost overruns on that project.

It was supposed to cost $1.9 billion.