Macroeconomics of the Federal Reserve System
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The United States has one of the most developed economies; its notes are an effective means of payment all over the world, what makes these countries economically dependent from the U.S. The Federal Reserve is the cornerstone of the monetary policy of the USA, which enjoys monopoly power to issue money to manage their turnover. The structure of the FRS differs from most of the central banks. Thus, the decision-making functions are distributed among the twelve members of the regional system. The Fed can control the money supply, which affects the interest rates. As the level of interest rates is a key variable, which set the growth or decline of the economy, the Fed actually affects the future state of the U.S. economy, and therefore, of the world.
We shell study the examples of the significant events in the structure of the Federal Reserve existence to determine the influence that it performs on the macroeconomics. Let's start with the most current news.
Ben Bernanke, Chairman of the U.S. Federal Reserve, is ready to leave his office. According to Bloomberg, such a statement was made by the head of the Fed after a conversation with the U.S. President, Barack Obama. "I do not consider myself to be the only person in the world, who can lead the implementation of the quantitative easing program," – Bernanke stated (Wardwell, 2012).
Actually, it is difficult to avoid analogies with 2006, when the experienced Alan Greenspan left his post, the monumental man, who headed the Federal Reserve for 19 years, under the four presidents. In those days, many experts were asking the question "Who is Mr. Bernanke?" No one, they said.
Bernanke can leave with a clear conscience: it is unlikely that Obama will come up with some other policies. It is doubtful, whether the global and the U.S. economies will return to sustainable growth, so the Fed will continue to put out economic fire with new amounts of money. Bernanke’s resignation will probably cause mainly human resources troubles for Obama: he has just reshuffled the officials of financial and economic power and barely pulled a new head of the Pentagon through Congress, and now - fresh troubles.
Another shock for the interconnected system of economic investments was the news on September 2012, about the beginning of a regular issuance program of the Federal Reserve, and the published data on the economic growth. These data were not very optimistic: The Fed lowered its forecast for the U.S. economic growth.
It’s important to note that the GDP figures are official; seriously overstated through various kinds of statistical tricks, like "hedonic" index. But even up to them it turns out that the GDP per capita, even with the growth of the U.S. population, falls. This fact partially explains the Fed's decision on issue (Hamilton, 2012).
In this case, the Fed has another problem: a clear acceleration of independent currency areas in the world. The U.S. monetary authorities actively oppose this process, but they do not succeed. But as the development of these alternative areas of interest will decline sharply against the dollar, it is a catastrophe, because without them the world purchases f Treasury bonds to finance the budget deficit of the U.S. will be extremely difficult. Actually, the understanding of the circumstances and causes force countries to avoid dollar operations: the faster it is done, the less of it will be lost. Of course, those, who have accumulated large dollar reserves, now lose money, but it is one more reason not to collect more of them. What the U.S. administration can come up with after the election is a big issue, but sooner or later they will have to acknowledge that the U.S. role in the world should be declined significantly. The saddest thing is that the monetary authorities of the country, which in theory would "hold" the situation, do no do it. Actually, they cannot, because they don’t have the crisis theory. And in the very near future we will have to see the consequences of this situation.
Another resonance was an article authored by the father of Reaganomics. Words of 84-year-old Paul Volcker differ from the official optimism of existing Fed officials. Well, frankly speaking, the official propaganda is shouting about the way everything is well "under the wise leadership of President Obama". But the real dilemma is to find something that would show the real state of affairs in these speeches.
Those are some of the points from the last speech of the president of the Federal Reserve Bank of Dallas, Richard Fisher:
- It is necessary to separate "banks are too large to fail";
- The economy is now in much better conditions than it was before ;
- Quantitative easing will not be supported;
- Inflation has started to decline;
- Inflation is not a problem, job creation - is;
- We need a good tax policy to support the efforts of the Federal Reserve.
He says that inflation is limited (with current techniques - of course), and that more money should not be printed. So he concludes that instead of printing money, we need to stimulate demand by reducing taxes. In other words, it is not as good, as we would like.
Let’s examine the words of Paul Volcker, "creator" of Reaganomics, the head of the Fed on the verge of 1970-80's, who now enjoys retirement and, therefore, is much more free in his statements. In the speech in a building in New York, where Abraham Lincoln announced the idea of a national movement in February 1860, he analyzed for reforms of both the public and financial systems. Volcker said that the U.S. faced economic and political problems that were of a "serious threat", even if they were peaceful compared to the struggle waged by Lincoln.
"This is not only our economic prosperity, which is in danger, but also our national security, and the ability to play a constructive role in a changing world", - the 84-year-old Volckerr said (Gelb, 2012). He noted that progress has been made in improving financial management, control standards, capital and liquidity rules for derivatives, but we needed to do more to regulate the money market of mutual funds, which he called a "new systemic risk", and to restore private mortgage market to replace the organization, sponsored by the government, which dominated the industry. As we see, Volcker emphasized the role of the U.S. currency institutions in forming the international markets.
Now we appeal to more frightening news that came earlier in 2012. According to the U.S. Treasury, the national debt equals to $16 trillion. Analysts have already expressed concern that it will finally undermine domestic demand in the U.S., which now is not in the best conditions. Also, the U.S. will face further reductions of the credit rating, if the long-term plan to reduce costs will not be developed. Earlier, the international rating agency S & P lowered the credit rating of the U.S. from the highest AAA to AA+ (Kessler, 2012). Decline in the credit rating will attract more expensive credit. Apparently, the tendency to increase the debt will continue, and if we analyze today's aggressive Fed policy, we can conclude that its leaders probably hold data that will never be announced to the general public.
But the news of great concern for most ordinary citizens was the information that the U.S. Federal Reserve plans to monitor the social media, such as Twitter and Facebook, on the subject of what people say and think about their organization.
Federal Reserve Bank of New York expressed interest in receiving technical offers from the developers of the "Platform for monitoring social media» (Social Listening Platform), which will allow viewing "the most massive social media platforms - Facebook, Twitter, Blogs, Forums and YouTube», says CNBC.
The U.S. Fed also hopes that the new system of monitoring online media will be able to perform tasks such as the "crisis management", "continuous monitoring of negotiations", "identification and determination of key bloggers and influential figures in the Internet", and the equipment must be capable to collect data from the various sources, such as CNN, WSJ, Factiva, and others. "In other words, the U.S. Federal Reserve wants to put all of the statements about themselves into groups of "negative", "positive" and "neutral" (Slavo, 2011).
Though the Federal Reserve said that the purpose of this system was to monitor the public perception of the organization, a number of participants in the blogosphere had already announced that it was the time to create an analogue of "Big Brother" of George Orwell's dystopian "1984". Thus, the Fed simply enters the Internet to spy on any statement about oneself made to the world.
What do we have in conclusion? The Fed is a very powerful institution. It’s one of the main regulators of the country, which fully influence the changes in the economic and political life of the United States and the world in this regard. Fed uses financial markets with almost the same effect. And as we have seen, every breaking news about Federal Reserve can perform striking effect on the world interest rates and public opinion.
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