Final answer:
The Federal Reserve is set up as an independent agency to protect it from political pressure, ensure stable monetary policy, and allow for rapid, nonpartisan economic decisions to prevent issues such as inflation.
Step-by-step explanation:
The reason the Federal Reserve (Fed) is set up as an independent agency of government is to protect it from political pressure. This independence is crucial to maintain stability in monetary policy, devoid of the influence of short-term political considerations. For instance, the longer terms of the Fed's Board members provide a buffer against the shifts that might occur due to changes in the presidency, ensuring monetary policy is based solely on economic considerations.
The Federal Reserve Act of 1913 established the Fed with the intent to regulate the banking industry and provide a more stable financial system. This act created a central banking system with the power to influence interest rates and the money supply, with checks and balances, such as appointments requiring Senate approval, to avoid concentration of power.
An independent Fed can make rapid and nonpartisan economic decisions, which is vital to prevent issues such as inflation that can arise from the overexpansion of the money supply if monetary policy were controlled by lawmakers responding to day-to-day politics.