The first fallacy is "Independent" the Fed is "Quasi-independent" it does not take direct orders from the Treasury or any other government agency but it is far from politically independent.
Congress is fully in control of the Fed. It can pass legislation to set an interest rate anywhere it wishes and the Fed must make sure that Treasury checks don't bounce within the limits of the debt ceiling also legislated by Congress.
The second fallacy is "loans" the government money. It is in fact the lender of last resort should nobody else be willing to buy U.S. government bonds.
Bonds are not a "funding mechanism" for federal spending. Since the Fed shares a balance sheet with Treasury any bond purchases it makes are only a formality to comply with another legislative demand by Congress requiring deficit spending to be "matched" (not funded) with bond issues. This requires reserves to be created prior to the bond purchase. Treasury bonds serve the purpose of hitting the interest rate target and supplying the means to satisfy the people's desire to save.
You say that government spending is what creates money (or as you say currency) but the Fed controls the money supply and can take money out of circulation or put money into circulation as fast or faster than Congress.
Congress is the only source of "net" money creation. The Fed can create reserves to match debt agreements or to convert Treasury instruments (bonds), but it can't increase the "net" money supply.
When a bank makes a loan it must meet reserve requirements and borrow for any shortfall from those who have extra reserves. Those borrowed reserves are balanced out of existence when the borrower pays down the principle of the note, and disappear when the loan is retired.
The Fed can put money into the economy with Quantitative Easing or Interest rate cuts (Monetary Stimulus) and take money out of the economy with Monetary Tightening (Taper or even reducing it balance sheet) and by raising interest rates.
QE converts bonds and other qualified instruments into reserves. I have a problem with this as it appears that no one is concerned with the "quality" of those instruments, only the quantity. While they represent money that was spent at one time I would question if that money was balanced against the debt as all Treasury instruments are.
Many insiders are also asking the same questions and are concerned that the Fed is laundering money with its combined balance sheet with Treasury. We may be experiencing another meltdown without being aware of it and further enabling the casino mindset of investment banks by backstopping their losses.
Beyond that: How do you figure that increasing interest paid on bonds somehow "reduces" money in the economy? Higher bond rates mean that the government must create more debt to retire bonds and businesses must pay higher costs of lending. While it slows the economy down when needed it actually adds more inflationary pressure in the long term process.
The U.S. Congress changing the laws to allow it to spend money without borrowing would only create new money if the Fed did not counter that with interest rate increases or sales of assets from its balance sheet.
The debt ceiling doesn't affect government bond issues for money Congress creates in deficit of taxation. All deficits must be matched with bond issuance by current law. It simply places a limit on the ability of Congress to create the money to purchase bonds. The sales of bonds require the return of the government's NET assets spent into the private sector, just as taxation does.
Congress can, and frequently does in war and disaster spending, give the executive branch authority to spend "off the books" (to quote W Bush) and that spending doesn't add to the debt. Congress can also "coin" money to remain on deposit at Treasury without issuing bonds to balance it out.
These measures only show what a sham the debt ceiling is and force our representatives to childish appearing workarounds in doing their job "for the common welfare" as the Constitution mandates in regard to creating money.
What we should be talking about is who we want to control the money supply, Congress or the Fed.
The Fed only has monetary policy to use in directing the economy. Sadly, that has been the only tool in use for some decades as Congress has abdicated its authority over fiscal policy in a permanent state of political deadlock. Monetary policy is slow to react and imprecise, as well as creating booms and busts that only benefit the investment class. Congress always had the purse strings in its grasp but lacked the political will to use them.
