Question

Do you agree or disagree with the contention that the Federal Reserve is innovative and useful, particularly as relates to matters of the social and ethical impact of their federal funds rate decisions? Why or Why not?

Answer 1

Do you agree or disagree with the contention that the Federal Reserve is innovative and useful, particularly as relates to matters of the social and ethical impact of their federal funds rate decisions? Why or Why not?

In my opinion, Federal reserve is useful but not innovative while macro managing economy. Federal fund decisions are taken according macroeconomics status of an economy and similar conventional monetray policy tools are used for it. Interest rates, discount rates, reserve rates, open market selling, quantitative easing are a few conventional methods and Federal reserves is not thinking of developing new tools for an economy.

Federal funds rates are the interest rates at which depository institutions like banks and credit unions give reserve balances to other depository institutions overnight. While deciding these rates federal reserve is many a times analytical and not practical. It uses arithmetic but not social effects with equal weightage.

For example- To control inflation based on a basket of few goods it changes policy rates but ignores consumers demand. Micro credit for poor gets affected and their economic growth is stunted. Similarly during recessions low rates are offered which again benefits rich borrowers but banks become critical of lending to needy poor due to fear of loan defaults.