Question

The Federal Reserve System is the primary regulatory agency governing the U.S. banking industry. It has singular importance in setting monetary policy and many economists believe it has substantial influence on the course of a business cycle. In the last few years, several senators/congressmen are proposing that the Federal Reserve Bank should be regulated and brought under their (congress and president) control. They believe that the Fed has kept the congress in dark and responsible in setting up conditions for the subprime mortgage meltdown.

Based on what you have learned in chapter 14, would you support these senators/congressmen idea of controlling the Federal Reserve Bank? Yes or No and Why?

Answer 1

The idea of regulating the Central Bank of the nation which controls the entire money supply in the economy by the government is not a reasonable idea. The Federal Reserve should remain an independent authority from the government because it is responsible for maintaining price stability in the economy. It should be allowed to independently determine the rate of interest in the economy keeping in view solely the current economic conditions in the economy and not being controlled by the government because that would put the economy on the mercy of populist measures to attract vote bank and macro economic parameters of the economy will suffer in this case. Absence of direct political pressures on the government helps Fed to carry out its functions of maintaining money supply and price stability in the economy effectively.