Question

Some observers argue that the mandate of the Federal Reserve should be changed to prioritize the control of inflation over other goals. Research and discuss the arguments for and against inflation targeting like this. Look into the policies of a different central bank when it comes to balancing inflation control versus other goals and share with the group what you found out.

Answer 1

The Federal Reserve of the United States, is the supreme body which governs the flow of money in the country as well as mandates regulations to control commercial banks.

Over a period of time, it has formulated the following core functions which define its very existence. These are as follows: -

1) Achieving Full Employment which is the rate at which most people in an economy, who are seeking job receive employment in the country.

2) Control the levels of inflation in the country.

3) To keep interest rates stable.

4) To help in keeping liquidity of a currency and its relative price to be sable.

5) To ensure compliance by the banking system.

Argument Against Limiting the powers of the Federal Reserve: -

If the Federal Reserve of the United States, had to limit its involvement in managing the economy to only controlling inflation, then the country would seriously have some critical flaws which would go unchecked. Inflation is defined as the general rise in prices of goods and services. It is agreed in the United States that a 2% target of inflation is correct as it indicates an increase in demand as well as employment opportunities in the country.

However, it is critical to remember, that as a country our only intention cannot be to manage the inflation rate alone. Other things such as currency stability, banking standards as well as employment are important considerations which in itself have a huge impact on the society at large and also inflation as a whole.

If the Federal Reserve was only to look at inflation and run its policies, it would be a highly pragmatic approach which would not allow for stability in the country at any time. If the Federal Reserve was only concerned for an example with inflation due to the recession in 2008, it would not have been possible to establish strong banking standards and norms which helped in improving the banking regulations in the country and bringing long term stability.

We can conclude by saying, that there are numerous reasons to an inflation or a recession cycle, and across the globe, it is considered to be a gold standard that banks are regulated by a central bank, who sets in policies for its very functioning and increases or decreases the flow of money as and when required. Only controlling inflation cannot be the target for any Central Bank as it then would create a financial system which would go unchecked and may lead to hyperinflation or a recession which may not be corrected in the long term. It is essential for a country to have a regulator of banks and to ensure compliance at all points of time.

Please feel free to ask you doubts in the comments section.