1. You have just been appointed the new Federal Reserve Chairman, congratulations!
What four monetary issues will you address and what will your actions be?
2. Is fractional reserve banking good or bad in your opinion?
3. Should the Federal Reserve be independent or dependent of the government in your opinion?
1. You have just been appointed the new Federal Reserve Chairman, congratulations!
What four monetary issues will you address and what will your actions be?
The Federal Reserve or the Federal Reserve System is the central banking system of the
USA. Federal Open Market Committee is a per of it that decides monetary policy. The
committee includes the 7 members that comprise the board of governors and five reserve
bank presidents. The FOMC meets eight times in a year to decide on key issues like interest
rates, and the level of money supply required for the economy to sustain its long-term
growth. The monetary policy is therefore, the responsibility of the FED.
In The Federal Reserve Act of 1977 clearly stated the objectives of the monetary policy
objectives:
"The Board of Governors of the Federal Reserve System and the Federal Open Market
Committee shall maintain long run growth of the monetary and credit aggregates
commensurate with the economy's long run potential to increase production, so as to
promote effectively the goals of maximum employment, stable prices and moderate long-
term interest rates."
This is referred to as the ‘dual’ mandate, where unemployment and inflation are of concern
to the FED. With this back ground 4 important monetary issues are:
Inflation rate- Despite a rise in money supply, inflation is under control in USA. it
stands at 2% for the last 12 months, which is the inflation target set by FED.
Technically a rising money supply can cause inflation if demand exceeds supply; but
recent data shows that prices are well within control. "Aside from the spike in
gasoline prices, which is already being reversed, it is hard to find any evidence of
major price pressures," according to Paul Dales, senior economist for Capital
Economics.
, Unemployment rate: This remains a problem area for policy makers as it stubbornly
remains at 8% despite massive fiscal and monetary infusions in the economy. While
this is lower than the historic rate of more than 9% that USA saw in the recession of
2009, it has not come down in large amounts. A part of the reason can be the non-
productive nature of fiscal expenditures and the existence of structural
unemployment. Whatever be the cause monetary policy agenda holds a reduction in
unemployment rate as a prime concern. Easy money supply is expected to fuel new
investments that generate jobs. such a policy is also a signal for an improvement in
business and consumer sentiment.
Rate of interest –Since 2008 FED has maintained low interest rates in the hope that
low cost of funds will encourage investments, that contribute to rising GDP. While
this has not had the desired effect on investments levels that remain sluggish, there
are risks to low interest rates in terms of future expectations.
Asset purchases. FED has indulged in unconventional measures like QE. Quantitative
easing is an expansionary monetary policy. It allows the central bank to print more
money, which is used to buy treasury securities from the market. This causes a rise in
demand for these securities, reducing the rates of return on them as well increasing
the liquidity in the system. Lower rates are good for investments and are expected to
boost investment demand, and therefore aggregate demand. The money generates
from QE was used to fund a fiscal expansion in the economy as part of the efforts to
boost effective demand by giving more money in the hands of people to spend and
easier and cheaper credit for investment purposes. Greater liquidity is theoretically
expected to raise effective demand and raise GDP in the process.
Now these methods are used by nations like Japan, and European Union to boost
their economies. A recent report by IMF- Global Financial Stability Report has raised
doubts on the long-term effects of these methods and the accompanying risks to
financial stability of the world economy. These must be treated as a short-term policy
measure, which supplements other structural improvements that improve the long-
term growth prospects of the economy.
What four monetary issues will you address and what will your actions be?
2. Is fractional reserve banking good or bad in your opinion?
3. Should the Federal Reserve be independent or dependent of the government in your opinion?
1. You have just been appointed the new Federal Reserve Chairman, congratulations!
What four monetary issues will you address and what will your actions be?
The Federal Reserve or the Federal Reserve System is the central banking system of the
USA. Federal Open Market Committee is a per of it that decides monetary policy. The
committee includes the 7 members that comprise the board of governors and five reserve
bank presidents. The FOMC meets eight times in a year to decide on key issues like interest
rates, and the level of money supply required for the economy to sustain its long-term
growth. The monetary policy is therefore, the responsibility of the FED.
In The Federal Reserve Act of 1977 clearly stated the objectives of the monetary policy
objectives:
"The Board of Governors of the Federal Reserve System and the Federal Open Market
Committee shall maintain long run growth of the monetary and credit aggregates
commensurate with the economy's long run potential to increase production, so as to
promote effectively the goals of maximum employment, stable prices and moderate long-
term interest rates."
This is referred to as the ‘dual’ mandate, where unemployment and inflation are of concern
to the FED. With this back ground 4 important monetary issues are:
Inflation rate- Despite a rise in money supply, inflation is under control in USA. it
stands at 2% for the last 12 months, which is the inflation target set by FED.
Technically a rising money supply can cause inflation if demand exceeds supply; but
recent data shows that prices are well within control. "Aside from the spike in
gasoline prices, which is already being reversed, it is hard to find any evidence of
major price pressures," according to Paul Dales, senior economist for Capital
Economics.
, Unemployment rate: This remains a problem area for policy makers as it stubbornly
remains at 8% despite massive fiscal and monetary infusions in the economy. While
this is lower than the historic rate of more than 9% that USA saw in the recession of
2009, it has not come down in large amounts. A part of the reason can be the non-
productive nature of fiscal expenditures and the existence of structural
unemployment. Whatever be the cause monetary policy agenda holds a reduction in
unemployment rate as a prime concern. Easy money supply is expected to fuel new
investments that generate jobs. such a policy is also a signal for an improvement in
business and consumer sentiment.
Rate of interest –Since 2008 FED has maintained low interest rates in the hope that
low cost of funds will encourage investments, that contribute to rising GDP. While
this has not had the desired effect on investments levels that remain sluggish, there
are risks to low interest rates in terms of future expectations.
Asset purchases. FED has indulged in unconventional measures like QE. Quantitative
easing is an expansionary monetary policy. It allows the central bank to print more
money, which is used to buy treasury securities from the market. This causes a rise in
demand for these securities, reducing the rates of return on them as well increasing
the liquidity in the system. Lower rates are good for investments and are expected to
boost investment demand, and therefore aggregate demand. The money generates
from QE was used to fund a fiscal expansion in the economy as part of the efforts to
boost effective demand by giving more money in the hands of people to spend and
easier and cheaper credit for investment purposes. Greater liquidity is theoretically
expected to raise effective demand and raise GDP in the process.
Now these methods are used by nations like Japan, and European Union to boost
their economies. A recent report by IMF- Global Financial Stability Report has raised
doubts on the long-term effects of these methods and the accompanying risks to
financial stability of the world economy. These must be treated as a short-term policy
measure, which supplements other structural improvements that improve the long-
term growth prospects of the economy.
