1.What is the Federal Reserve (Fed) all about? 2.Who is the current Chairman of
ID: 1235299 • Letter: 1
Question
1.What is the Federal Reserve (Fed) all about?
2.Who is the current Chairman of the Fed?
3.Should the Fed remain independent from political authority or should the President and Congress have a say in their operations? Why? Why not?
4.What is FOMC? What is the current Federal Funds Rate?
5.How does the Fed implement monetary policy to manage the economy?
6.At the last meeting of the FOMC, what was done to the federal funds rate--increased, decreased, or no change from previous meeting?
7.Given the current state of the U.S. economy, should the Fed be using expansionary monetary policy or contractionary monetary policy? Why? Why Not?
Explanation / Answer
A:iled Under » Economics, Economy, Interest Rates, Laws The Federal Reserve was created by the U.S. Congress in 1913. Before that, the U.S. lacked any formal organization for studying and implementing monetary policy. Consequently markets were often unstable and the public had very little faith in the banking system. The Fed is an independent entity, but is subject to oversight from Congress. Basically, this means that decisions do not have to be ratified by the President or anyone else in the government, but Congress periodically reviews the Fed's activities. The Fed is headed by a government agency in Washington known as the Board of Governors of the Federal Reserve. The Board of Governors consists of seven presidential appointees, each of whom serves 14 year terms. All members must be confirmed by the Senate and can be reappointed. The board is led by a chairman and a vice chairman, each appointed by the President and approved by the Senate for four-year terms. The current chair is Ben Bernanke, who took over for Alan Greenspan on February 1, 2006. Greenspan had been chairman since 1987 B:Ben S. Bernanke began a second term as Chairman of the Board of Governors of the Federal Reserve System on February 1, 2010. C:Background: In the last century, central banks all over the world gained varying degrees of independence from their ruling governments, including the Federal Reserve of US, which has been highly autonomous in making its monetary policies since the day of its inception. Whether or not should the central bank enjoy such freedom from government is a question that every country must answer. Question: How much independence should the Federal Reserve have? Method: To determine the extent to which the Fed should be free from, or under the control of the government, an in-depth analysis of a highly dependent and an equally independent Fed is required. We shall see how an independent Fed checks inflation, encourages employment and stimulates growth and how a puppet-like Fed sends the ruling government on a federal spending spree. We will also see how an all-powerful Fed can in fact misuse its powers and freedom, and bring about a financial turmoil. It is only after weighing both sides of the argument that we can determine the degree of freedom that the Fed should enjoy. Conclusion: The Fed, though in its present state is highly autonomous, needs a stricter eligibility criteria, shorter terms for its members, more freedom from the government with respect to biannual reports, and much more power in front of the government in financial matters. That is, the Fed should have the power to recommend, if not require, the government to stay within certain boundaries when it makes decisions related to earning and spending. 4:Federal Funds Rate Predictions: Current Options on federal funds futures can be analyzed to extract public expectations of future Fed actions. The charts below show what markets believe the most likely outcome of upcoming FOMC meetings will be. The charts are updated every business day and reflect the most recent data released by the Chicago Board of Trade. Probabilities can be estimated with various assumptions, which are described in detail here and in the readme worksheet of the downloadable Excel file. The assumptions used to construct each day's charts are indicated immediately below the pictures. 5:The Federal Reserve implements monetary policy using three major tools. Open market operations--purchases and sales of U.S. Treasury and federal agency securities--are the Federal Reserve's principal tool for implementing monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). This objective can be a desired quantity of reserves or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The second major monetary policy implementation tool is the discount rate. The discount rate--the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--is established by the Board of Directors of the Federal Reserve Banks subject to review and determination by the Board of Governors. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. Further information on the discount window, including discount rates, is available on the Federal Reserve's discount window Web site. 6:The Fed's announcement made it unlikely that the federal funds rate, which has stood at a target of 0-0.25 percent since the last recession, will see any changes in the ... rates this year or next, and a split vote on the likelihood of increase ... with renewed commitment, as the latest meeting outcome indicates. 7:Expansionary policy will help avoid deflation, for a while. The problem is that it is inherently inflationary, and the things that inflate fastest are things people need to make it every day. That in and of itself is long run plan deficient. The other problem is that one of the things that absolutely needs to happen is protection when people start refusing to repay any of their credit. The wieght of the unsecured credit system is ready to collapse a huge part of the economy when unemployment finally runs out, and reserves need to be increased to cope with the problem, because doing it the day after won't be much help. And raising the reserve is contractionary, nominally, so professional bankers are loathe to do what clearly needs done. We are being run by retarded economists while the good ones are still teaching.
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