BUS322 Chapter 9
Why might eliminating the Fed's independence lead to a more pronounced political business cycle?
Eliminating the Fed's independence might not make it more shortsighted and subject to political influence. Thus, when political gains could be achieved by expansionary policy before an election, the Fed might be more likely to engage in this activity. As a result, more pronounced political business cycles might result.
"The independence of the Fed leaves it completely unaccountable for its actions." Is this statement true, false, or uncertain? Explain your answer.
False. The Fed is still subject to political pressure because Congress can pass legislation limiting the Fed's power. If the Fed is performing badly, Congress can therefore make the Fed accountable by passing legislation that the Fed does not like.
Why was the Federal Reserve System set up with 12 regional Federal Reserve banks rather than one central bank, as in other countries?
Because of traditional American hostility to a central bank and centralized authority, the system of 12 regional banks was set up to diffuse power along regional lines.
"The Federal Reserve System resembles the U.S. Constitution in that it was designed with many checks and balances." Discuss
Like the U.S. Constitution, the Federal Reserve System, originally established by the Federal Reserve Act, has many checks and balances and is a peculiarly American institution. The ability of the 12 regional banks to affect discount policy was viewed as a check on the centralized power of the Board of Governors, just as states rights are a check on centralized power of the federal government. The provision tat there be three types of directors (A,B, and C) representing different groups (professional bankers, businesspeople, and the public) was again intended to prevent any group from dominating the Fed. The Fed's independence of the federal government and the setting up of the Federal Reserve banks as incorporated institutions were further intended to restrict government power over the banking industry.
Which entities in the Federal Reserve System control the discount rate? Reserve requirements? Open market operations?
The Board of Governors sets reserve requirements and the discount rate; the FOMC directs open market operations. In practice, however, the FOMC helps make decisions about reserve requirements and the discount rate.
The Fed is the most independent of all U.S. government agencies. What is the main difference between it and other government agencies that explains its greater independence?
The Fed is more independent because its substantial revenue from securities and discount loans allows it to control its own budget.
In what ways can the regional Federal Reserve banks influence the conduct of monetary policy?
The Federal Reserve Banks influence the conduct of monetary policy through their administration of the discount facilities at each bank and by having five of their presidents sit on the FOMC, the main policymaking arm of the Fed.
The Fed promotes secrecy by not releasing FOMC minutes to Congress or the public immediately. Discuss the pros and cons of this policy.
The argument for not releasing the FOMC directives immediately is that it keeps Congress off the Fed's back, thus enabling the Fed to pursue an independent monetary policy that is less subject to inflation and political business cycles. The argument for releasing the directive immediately is that it would make the Fed more accountable.
What political realities might explain why the Federal Reserve Act of 1913 placed two Federal Reserve banks in Missouri?
The placement of two banks in the Midwest farm belt might have been engineered to placate farmers, an important voting block in the early twentieth century.