Question

The Fed (Federal Reserve System) was given great power in 1913 to undertake potentially beneficial actions. Did this also give it a great power to engage in potentially harmful actions? Explain why or why not.

Answer 1

There are advantages and disadvantages in holding this much power and influence over the monetary system in the United States. Federal Reserve System is a rule-based system that possesses some clear advantages. Creating the Fed helped to increase transparency, predictability, accountability, and credibility of future policy actions. Having Federal Reserve System alleviated bank panics in the past and restored public trust in the bank system. In 1913 it became clear that banks needed a centralized regulated system in order to continue functioning and building a healthy financial relationship with their customers. They had to stop bank runs and restore trust in the financial system of the United States. The Federal Reserve Act intended to establish a form of economic stability in the United States through the introduction of the Central Bank, which would be in charge of monetary policy. The Federal Reserve Act is perhaps one of the most influential laws concerning the U.S. financial system. The Fed was given the ability to print money in order to ensure economic stability. More specifically, the Federal Reserve System created the dual mandate to maximize employment and keep inflation low. Moreover, the Fed received the power to adjust the discount rate/the fed funds rate and buy and sell U.S. treasuries. The federal funds rate, or the interest rate at which depository institutions lend funds maintained at the Federal Reserve to one another overnight, has a major influence on the available credit and the interest rates in the United States and is a measure to ensure the largest banking institutions do not find themselves short on liquidity.
However, having such influence and power indicates that the Fed can manipulate the economy. As it can keep rates low or high, it has the capability to foster growth or hinder it. It can inflate massive bubbles and then just pop them up. While many Americans give much credit and blame to the presidents on how the economy is doing, these leaders actually do not much control over it compared to the Fed. It is often regarded as anti-capitalism, as finances are controlled by a huge government organization, instead of a group of private businesses. Although, the Fed does not answer to Congress and it is not exactly part of the U.S. government. Same time, it has the most power and control over the U.S. dollar. Today, the US government is not the one issuing any money, but the Federal Reserve. Whenever the government wants to create more currency, it has to go into more debt.
Because all the power is concentrated in this particular institution there is a concern that private interest and lobby groups have a great deal of influence over the Federal Reserve, allowing individuals to benefit rather than the whole society and taking away the well-being and rights of the public. Despite being a government institution, it is still run by business-minded individuals, which can open the institution to a great deal of corruption.
Lastly, one of the biggest problems is that the Fed sets rates based solely on economic data such as output gap and inflation rate. It's hard to measure inflation and GDP or unemployment in a real-time, so every decision in setting monetary policies or acknowledging and then fighting the financial crisis takes time while the macro environment is constantly changing.