Question

In: Economics

1. Does the FED have too much power on international arena? 2. Does the FED abuse...

1. Does the FED have too much power on international arena?

2. Does the FED abuse its power?

3. How can the FED influence global economy?


Solutions

Expert Solution

1) As the central bank of the United States, the Federal Reserve plays a variety of roles in the international arena. By influencing interest rates, the Fed's monetary policy affects the foreign exchange value of the dollar. Also, when the U.S. monetary authorities decide to intervene in the FX market, it is the Fed that executes the intervention.

So, Yes The power to inflate the currency at will is too much power for anyone to have.

2) Yes, there were few events where fed has abused its powers one such example is this:

When Fed chairman Ben Bernanke initiated the first round of Quantitative Easing (QE), the stated goal was to revive the flagging housing market by purchasing $1.25 trillion in mortgage-backed securities (MBS) from the country's biggest banks. The policy was a ripoff from the get-go. No one wanted these mortgage stinkbombs that were stitched together from subprime loans to unqualified applicants. But because the banks were already busted--and because the $700 billion TARP was barely enough to keep the ventilator running until the next bailout came through-- the Fed helped to conceal its real objectives behind an elaborate PR smokescreen. In truth, the Fed must have colluded with the banks to move the toxic assets off their books (and onto the Fed's balance sheet) with the proviso that the banks withhold foreclosed homes from the market.

3)  US interest rates negatively impact the global economy, rising interest rates do benefit foreign trade. The stronger dollar that will accompany the rate increase should boost US demand for products around the world, increasing corporate profits for domestic and foreign companies alike. Fed plays an important part in influencing global economy following are some views:

  • Periods of expansive monetary policy are associated with strong stock performance, whereas periods of restrictive monetary policy generally coincide with weak stock performance
  • Small-cap companies are more sensitive than large-cap companies to changes in monetary conditions.
  • Cyclical stocks have a much higher sensitivity to changes in monetary conditions than defensive stocks.
  • U.S. monetary policy has an important influence on global markets.

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