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? [In addition to using your textbook, I would also suggest you to do some research before you begin explaining your answer]

Answer 1

The Federal Reserve Banks are not a part of the federal government, but they exist because of an act of Congress. .While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends.

The primary justification for an independent Federal Reserve is the need to insulate it from short-term political pressures. Without a degree of autonomy, the Fed could be influenced by election-focused politicians into enacting an excessively expansionary monetary policy to lower unemployment in the short-term.

Congressional Appropriations

Unlike most federal agencies, the Fed’s budget is not subject to congressional appropriations. Instead, the Fed is self-funded, primarily through the interest earned on the securities it owns, as well as the fees it receives for services it provides to depository institutions such as check-clearing, fund transfers, and automated clearinghouse operations. The financial arrangement is key to the independence of the Fed, allowing it to operate independently of day-to-day partisan political pressures. If the Fed was under the normal appropriations process, it could be pressured to make certain decisions not because they constitute good monetary policy, but rather because the governors feared that their funding would be stripped. It’s worth noting that over the years, there have been several bills in Congress that would subject the Fed’s nonmonetary policy functions to appropriations while maintaining the current funding stream strictly for its monetary functions. By not including monetary functions in these bills, Congress is again signaling the need to keep monetary policy independent from political influence.

Accountability

While ensuring independence of the Fed is critical to maintaining monetary policies that are free from undue political interference, ensuring the accountability of the Fed, as well as all other government agencies, is equally important. Although the Fed is independent of the legislative and executive branches, it is still accountable to Congress. The Fed is statutorily required to testify semiannually before and present a written report to the House Financial Services Committee and the Senate Banking, Housing, and Urban Affairs Committee. As Fed Chairman Jerome Powell told the Senate Banking Committee on July 11, 2019, the Fed’s “independence brings with it an obligation for transparency so that you and the public can hold us accountable.” These hearings provide an opportunity for Congress to conduct oversight of monetary policy, regulatory policy, and a variety of other issues in a manner that is open for the public to see. In addition, the Fed has an Office of Inspector General that is tasked with providing oversight by conducting audits, investigations, and other reviews related to programs at the Fed.

By establishing the Federal Reserve and the various mechanisms that ensure its independence, Congress has made clear it does not want monetary policy affected by undue political interference. The Fed serves the American people and the American economy, not politicians. Furthermore, as is the case with all federal agencies, it’s critical that the Federal Reserve continue to be accountable to Congress and the American people.

The Banking Act of 1933, among other things, better positioned the Federal Reserve Board as the supervisor of the regional reserve banks, a response to the earlier efforts of the Federal Reserve Bank of New York to position itself as the leader of the entire Federal Reserve System. Before that law, the Fed did not have as much influence as the individual reserve banks, and simply approved the interest rates that individual reserve banks charged commercial banks. The New York Fed had been particularly powerful. In trying to head off a recession after World War I, it began engaging in what’s known as “open market operations.” Open market operations is the practice of purchasing large amounts of government securities as a means of managing the amount of money in the U.S. economy, thus affecting interest rates. The New York Fed also worked with foreign central banks, and its monetary policies helped stabilize prices in the United States and abroad, which in turn led to rapid U.S. economic growth throughout the early and mid-1920s. The New York Fed and its governor, Benjamin Strong Jr., demonstrated the significance open market operations can have in influencing the availability of credit in the banking system, and drew worldwide praise for their actions. These efforts were effective and had a lasting impact on the future of the Fed’s activities and structure, including being the beginning of the Fed’s practice of using open market operations as a means of stabilizing the economy and domestic prices.