Just as Congress and the President control itfiscal policydominates the Federal Reserve Systemmonetary policy, control over the supply and cost of money. Because monetary policy affects all sectors of the economy, the Fed should be considered equal to the President and Congress in macroeconomic decision-making.
Fed structure
The Federal Reserve System consists of a seven-member board of governors in Washington, D.C., and twelve regional banks, each controlled by its own directors. These regional institutions, owned by commercial banks within their jurisdiction, deal only with the Ministry of Finance and their member banks, and not with the general public. They don't lend money for cars or houses, and their main assets are US government bonds (like Treasury bonds). The Federal Reserve Bank also performs various services for other banks, such as check processing and cash storage and distribution. All national and state-chartered banks are subject to the supervision and regulation of the Federal Reserve.OfBoard of Governors of the Federal Reservemonitors the entire system. The president appoints six of the governors (subject to confirmation by the Senate) for fourteen-year terms and the chairman of the board of directors for a four-year term. (The terms of office of the president and chairman, however, do not overlap.) Alan Greenspan is the current chairman.
Fed operations
Although the Constitution authorizes the government to “coin money,” it would be impractical to control its supply by speeding up or slowing down the printing presses. After all, if enough were printed, it would quickly become worthless. It is also impractical to link the value of paper money to precious commodities such as gold or silver, because the supply of these commodities does not always keep pace with economic growth. Governments discovered that when these metals did not keep pace with growth, there was usually insufficient currency available to finance investment and consumption. Therefore, the Fed relies on its legal authority to manipulate “fiat money”: paper money, coins, money in checking and savings accounts, and other legally accepted forms of exchange.The Federal Reserve System controls the money supply in three ways:
Booking conditions. Banks are required to keep a certain portion of their deposits as a "reserve" against possible withdrawals. By varying this amount, a call is madereserveverhoudingthe Fed controls the amount of money in circulation. For example, suppose it orders banks to hold an additional 1 percent of their deposits. They would then have 1 percent less to borrow. One percent may not sound like much, but it translates into billions of dollars being sucked out of the economy.
Rabat. When banks impose temporary obligations on themselves, they must occasionally borrow money from the Fed to secure the funds needed to meet their reserve requirements. The interest on these loans is the discount rate and also affects the money supply. If the Fed raises the discount rate, banks cannot afford to borrow as heavily as before and must limit their lending and raise their own interest rates. This means less money flows into the economy. Conversely, if the Fed relaxes its discount rate, financial institutions will have more dollars for their customers. Seen from this perspective, the discount rate has a snowball effect: an increase in it means that other interest rates also rise and that, all things being equal, economic activity decreases; a decline has the opposite effect.
Open market operations. These are by far the Fed's most important activitiesopen market operations, purchase and sale of government bonds. After Congress approves an increase in the national debt, the Treasury Department is preparing a mix of bonds and bills, noting that it is auctioning to private dealers licensed to trade government bonds. When the Fed wants to influence economic activity, the Fed buys or sells these assets through its Federal Open Market Committee (FOMC), or open market desk as it is commonly known.
The process works like this: When the Fed decides to increase the money supply, its open market manager buys back government bonds from private dealers and pays for them by simply crediting their bank accounts. No actual cash is transferred. (This power sets it apart from all other financial institutions and gives it its influence.) The dealer banks now have more money to lend, and these loans eventually find their way to more banks, which pass some of them on to more borrowers. So the Fed's initial purchase has a multiplier effect as money flows through the economy. Of course, the process is reversed when the Fed sells some of its securities, because it effectively takes the price out of the buyers' accounts, leaving their banks with fewer deposits.
The main idea is that the Fed's accounting maneuvers, not turning the printing presses on and off, cause the money supply to increase or decrease.
Fed and the political systemHow to interpret the Fed in relation to various models of who governs, such as:pluralismof die enepower elite, depends on how much independence from political influence one thinks the system has. On paper, the Federal Reserve System appears to be relatively autonomous, because it receives its operating income from its constituent banks, rather than from Congress's appropriations, and because once in power its governors cannot be removed by the president . The long tenure of governors means that a resident of the White House cannot expect to get a majority of governors. The Fed also holds its meetings behind closed doors and is not legally required to report to the executive branch. Given these circ*mstances, one might think that it could escape public responsibility entirely.
Yet the Fed is also the creation of Congress, which takes a keen interest in its work and can always change its charter. In addition, in practice, Fed officials must interact daily with senior staff at the Treasury Department, the OMB, and other agencies. The President regularly testifies before legislative committees and consults regularly with the President's staff. All members of the board realize the value of maintaining support on both sides of Pennsylvania Avenue, because they know that determined political opposition can undermine their policies. In short, the Federal Reserve's legal independence does not protect it from political pressure.
The ill-defined boundaries between the Fed and the rest of the Washington establishment lead to endless debates about its autonomy. Some observers emphasize the Fed's political nature, arguing that it is very attentive to the wishes of the White House. Presidents typically want to keep the money supply flowing freely enough to keep the economy growing and will pressure the Fed to achieve this outcome. Board members do not want to antagonize the CEO, and when forced to do so, they often yield.
Some political economists go even further: they discover apolitical monetary cycle(PMC), where the Fed eases monetary policy in the months before presidential or congressional elections, hoping that business will pick up and thus make the incumbent president's party shine in the eyes of voters. Once the campaign ends, the screws will be tightened again to keep inflation low. According to this interpretation, the Fed rhythmically starts and stops the economy for partisan political purposes. If this is true, the existence of a PMC could indicate that the Fed is at least indirectly accountable to the people, as democratic theorists hope.
Others, however, question the Fed's susceptibility to presidential influence and question the entire PMC concept. It seems unlikely, they argue, that the Fed would act so openly on behalf of anyone, because such partisan behavior would undermine its reputation in financial circles for competence and objectivity. It is also questionable whether the Fed has sufficient data and knowledge to refine the money supply in the short term. Monetarism is ultimately a broadsword, not a scalpel, and cannot be applied with the precision assumed by the PMC hypothesis. Finally, several empirical studies dispute the existence of a political monetary cycle. One economist said he could not find “a single episode in the Fed's history that would indicate that [the Fed] had bowed to the president's pressure, nor many episodes that would indicate that the Fed has resisted it.” ”.
If the Federal Reserve System avoids the hallmarks of bias, what factors influence its actions? It can be said that it has many of the characteristics of apower elite. First, monetary policy is an important decision by any reasonable standard. The availability of money and the level of interest rates affect employment, prices, savings, investment, growth and productivity, touching the lives of everyone from the smallest consumer to the largest company. These policies are developed and enforced by the Fed's Board of Governors and its operating arm, the FOMC, two small, unelected groups of men and women with close ties to the banking and financial communities. In fact, the background of the Fed's top officials is one of its most distinguishing features. Although many of them come from humble backgrounds, they have spent most of their careers at major banks and investment firms on Wall Street, and many, like former Fed Chairman Paul Volcker and current Chairman Alan Greenspan, have worked in these areas shuttled back and forth between jobs. private finance. institutions and key positions in the US government.
When you spend your life in banking, business and commerce, you create that kind of loyaltypower elite schoolpredicts. One expert, who does not necessarily accept the power elite's thesis, nevertheless gives credence to it, writing that "Federal Reserve officials operate in an environment largely shaped by the interests and concerns of commercial bankers."
In short, to the extent that fiscal policy appears to be in line with thispluralisticinterpretation of US politics, monetary policy approachespower elite model. But before we accept any of these theories, we must see what influence the public as a whole exerts.
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