Question

In: Economics

What changes in the organization and activities of the Federal Reserve Board would you suggest to...

What changes in the organization and activities of the Federal Reserve Board would you suggest to improve operations? Should the Fed be more or less powerful? Does having a regional banking system instead of one central bank make any difference in the economy anymore? Which of the monetary tools - Open Market Operations, Discount Policy and Reserve Requirements - seems most effective?

Solutions

Expert Solution

Federal Reserve is governed by the board of governors and has one Federal Reserve bank in each of the 12 federal Reserve district of the USA. The Federal Reserve should be awarded more statu-tory authorities and include independent economists and scholars on board to get independent views about the policies. It will help the Fed to take better decisions. The Federal Reserve can also work in alliance with the FTC to regulate the capital market also. It will give more credibility to the financial system. Hence, the Federal Reserve should be more powerful and independent of any kind of political influence.
It makes a difference as regional bank system makes regional bank to focus upon the regional interests and it can be nullifying the action of each other banks' initiatives. Hence, the Federal Reserve acts as the central bank will all the benefits of the regional banking system as there are 12 federal reserve banks in each of the federal reserve districts to report, supervise and regulate the financial system of the each federal reserve district. Here, one central bank as the Federal Reserve brings policies that complement each other rather conflicting each other.
We have regional banks, but regional banks report to the central bank. It becomes very difficult to have one bank who looks after the whole USA economy. Hence, 12 regional federal reserve banks are established in 12 federal reserve district, reporting to the Federal Reserve board of governors.
These regional banks give inputs to the Federal Reserve and the central bank prepares policies. It works well as it does not only give different services to the bank and government, but also it regulates the whole banking system. It is the efforts of the Fed that the USA economy has now recovered from the recessionary impact of the 2008 crisis.
Federal Reserve most frequently uses open market operation via FOMC and Federal Reserve bank of New York to achieve the money supply target. Frequent change in Federal fund rate or discount rate can bring volatility in the economy.


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