Independence of Fed

Introduction

The Fed, also known as Federal Reserve System, is a system of banking in the United States, established after a series of financial fears in 1907. The unstable economic situation increased the desire of the monetary system’s central control to alleviate future financial crises. The roles and responsibilities of the Fed were also expanded after the Great Depression and the Great Recession (Bernanke 18). The duties of this entity lie in maintaining stable prices, enhancing full employment, and ensuring the regulation of long-term interest rates. Aside from that, the Fed controls and supervises banks as well as makes sure that the financial system is stable. Nevertheless, its independence comes with both pros and cons, as explained below.

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Pros

The Fed Establishes the Currency of the Country

Prior to the implementation of the Fed system, tens of thousands of currencies were used in the USA. Thus, the Fed ensured that there was a single currency that became valid all over the country (Axilrod 23). This, in turn, helped in the smooth running of the economy.

The Fed Increases Predictability and Transparency

The monetary policy of the Fed uses the rule-based system that enhances predictability and transparency in order to help the Central Bank in explaining its activities to the public, while the market can also predict the actions of the Fed. According to Axilrod (24), this has an important impact on the lives of people since low-interest rates are more favorable for debtors if compared with creditors. Since the market observers are able to identify the Fed’s plan and act accordingly, they will save much money and time as well.

The Fed Enhances a Sound Financial System

The independence of the Fed system helps it conduct the monetary policy of the country and influence the condition of credit and money in the economy. Consequently, this is done to enhance full employment and the stability of prices (Bernanke 20). Apart from that, the Federal Reserve System supervises and regulates banks as well as other major financial institutions to ensure that the financial system is sound and to protect the credit rights of consumers in the country.

The Fed Denotes the Country and Its Financial Interests

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Without the independence of the Fed system, the representation of interest rate would be entrusted to banks. This would not be a perfect financial decision since many banks are usually more concerned with private than the public sector. In addition, the Fed requires banks to be impartial and subject themselves to external audit (Bernanke 19). Consequently, without this system, all audits would be performed internally, which could increase corruption among banks.

The Fed Increases Accountability and Credibility of the Actions of Future Policy

The independence of the system under discussion has enabled it to set the rules in order to reduce the incentive to renege on their promises later. It is argued that the absence of the rule-based system can still force the Central Bank to promise low inflation level, but it would be lured into printing money just to produce the government revenue (Lowenstein 52). This situation would undermine its credibility.

The Fed Contains the Systemic Risks of the Financial System of the Country

The Fed emphasizes on sustaining the stability of the financial system as well as covering the systemic risks that are realized in the financial markets. At the same time, it provides the institutions of banking and foreign official institutions as well as the government with monetary services. In addition, it plays a key role in supervision and operating the country’s payments systems (Lowenstein 52). All these help ensure that the financial situation of the country is good.

Cons

The Fed Is Regarded Invasive and Unconstitutional

The independence of the Federal Reserve System has been criticized by many people for not favoring capitalism. Such a criticism is caused by the fact that finances are controlled by an enormous government organization rather than a group of private companies (DiMartino Booth 24). This means that the government would expand in size, a situation that many people criticize.

The Fed’s Independence Can Lead to Inflation

Since it is duty is to control monetary policy, the Federal Reserve System can have a direct influence on the citizens of the country. Apart from that, it has a role of printing the currency within the state. This may appear risky to the population since it has power over the country’s or the government’s economy (DiMartino Booth 25). Therefore, this can lead to the destruction of the currency with the purpose of suiting its own benefits. Eventually, this may cause the increase of inflation, which might, in turn, distort any appearance of the purchasing power.

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The Fed Can Misuse Its Powers

One problem with the Fed is that a few people hold much power, while the Board chairman is even more powerful. According to DiMartino Booth (25), since the chairman has the powers that can influence all financial markets worldwide, they can make any financial decision that may come to hurt the country. Moreover, the chairman of the Fed and the president may conspire to destroy the country financially. Finally, the powerful Fed chairman is not elected by the common people, which means they cannot terminate the tenure of this person.

The Fed May Make an Incorrect Decision

The targets and goals that the Federal Reserve System attempts to realize are set after it has made careful planning and considerations. However, some of its decisions are not supported by months or even years of research. Similarly, its day-to-day activities are mostly automatic responses to financial markets’ tantrums (Summers 18). For example, while the Fed had endeavored to sustain low inflation rates for years now through the regulation of interest rates, it took it only two months to decrease these rates significantly in 2000. Although it was supported by years of experience, one could see that the Fed could make hasty major decisions that might result in far-reaching impacts. Such a high degree of autonomy can be questioned since it can prompt it to make the hasty decision that can lead to recession or depression.

The Fed Can Manipulate the US Economy

The Federal Reserve System can lead to the manipulation of the national economy since it can set national interest rates. Since it can keep them low or high, it is capable of either fostering or hindering economic growth. Moreover, this can inflate huge bubbles and, at that moment, pop them up (Summers 18). While many Americans may hail the Fed and blame the president with regards to the doing of the economy, in reality, the head of the state does not have much control over it as compared to the Federal Reserve System.

Conclusion

In conclusion, the independence of the Fed is important in knowing the roles that this body plays in regulating the country’s financial conditions. The benefit lies in the fact that it allows the Fed to establish the currencies of the country, to increase predictability and transparency, and to enhance a sound financial system. However, the shortcoming of the Fed’s independence is that this institution is regarded as invasive and unconstitutional. This might lead to inflation and the misuse of its powers by the board. Apart from that, the Fed can make an incorrect decision and it can manipulate economy of the country. Therefore, as much as the Federal Reserve System endeavors to enhance the financial well-being of the state, certain measures need to be considered in order to escape the financial calamities that it may bring.

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