The Federal Reserve is the central bank of the United States. Though they have various duties (see this link for a slightly more complete picture), today we’ll focus on the “Fed’s” two primary monetary policy directives:
1. Keep inflation in check (ideally around 2%) 2. Keep unemployment low (a.k.a avoid a recession)
To keep the economy healthy the Federal Reserve loves to employ one tool in particular, interest rate hikes/cuts. I won’t get into how this works (if you are curious see this video) but in simple terms, high interest rates theoretically curb inflation and low interest rates theoretically stimulate the economy, decreasing unemployment.
For example, during the Covid-19 pandemic the Fed brought interest rates to near zero, incentivizing investments in the economy that would help the country navigate the incoming recession. As touched upon earlier, a side effect of lowering interest rates is increased inflation. And boy did inflation increase. We’re actually still grappling with inflation today, and for the past few months/years the Fed has been aggressively raising interest rates in an attempt to rein in the economy. As of December 2023, interest rates are in the 5.25% to 5.50% range, a 22-year high.
But all is not lost! The Fed has recognized that inflation seems to be slowing, and is pivoting to prevent a recession. They have announced a tentative plan to implement multiple rate cuts in 2024. Right now the Fed expects to end 2024 with a 4.6% rate. Many Wall Street analysts were surprised, expecting much steeper cuts (Link).
The economy is incredibly complex, and it can take years for the effects of the Fed’s monetary policy to become fully clear. In the meantime, we can only cross our fingers and hope that the Fed’s plan works out. On that somber note, we can now enjoy an incredibly subtle segue into how this relates to what we are currently learning in class.
Previously in AP Gov we explored the presidency. The nomination process for Governors of the Federal Reserve’s board is similar to that of the Supreme court, with the President having the power to nominate candidates to the board and Congress charged with approving the President’s picks. The Fed’s Board of Governors, while very powerful, is pretty much where the federal government’s involvement ends. The Federal reserve is a unique institution in that it is made up and directly influenced by (big) private banks that own shares in the Federal Reserve. The management structure is a bit convoluted (check it out here) but the President, despite being Chief Executive, has almost no say in how the Fed chooses to approach its duties.
The relationship between the president and the Fed as a whole is fairly opaque. In fact, back when Trump was still president some thought that Trump would attempt to fire Board Chairman Jerome Powell. This would have been uncharted legal territory and even experienced legal scholars weren’t sure if Trump was allowed to fire Powell and if so, under what circumstances he could do so at all (PBS Link).
- Vishal D.
NYT WSJ Reuters Article about the Fed’s controversial status. Does it really help us in economic crises? Or does it just make things worse?
6 comments:
I think this provides some optimism for the economic stability of the country. Currently, the US and the world are in disunion and in quite an unstable situation, with not just the inflation and social/economic issues rampant in the US but also the global conflicts that are simultaneously occurring throughout the world. I often hear people, oftentimes Republican, complaining about the Biden Administration's inability to deal with inflation- the president doesn't have the power to control price hikes, and the economy and certain situations are unpredictable. For example, the Great Recession and COVID-19 were not necessarily Bush's or Trump's faults, but their policy in dealing with these events played a part in how effective they were at their job. In the case for Biden, there were a lot of things that weren't his fault, such as the Russian-Ukraine War, in which this war affected Russia's main export, oil, to countries like the US, causing energy prices to rise. Part of this could be attributed to Biden's administration in making the decision to place sanctions and embargo on Russia due to their decision to invade Ukraine, but this was an act that solidified their stance in solidarity with Ukraine. Overall, I think Biden definitely has made a couple errors in making impacts on the economy- I believe the country is spending too much, especially on things that I don't agree with, such as a lot of military spending, However, I don't think it's fair to put all the blame of all the faults of the economy on him, but have a more outward perspective on how foreign affairs affect the economy as well as the randomness of the economy all-together.
I found it interesting that big private banks directly influence the Federal Reserve, which controls the country's monetary policy and financial stability. To me, it seems like this system could possibly go corrupt very quickly if the Federal Reserve is heavily influenced by a lot of power hungry corporations. Do these corporations take into account the interests of everyday people?
I have two comments to make on this blog.
First of all, I think it's very important and healthy for the ideal of separation of powers that the executive branch has little influence on how the Federal Reserve operates. I think leaving this particular branch of governance to large private banks is a relatively stable way to maintain the economic strength of the country because banks are automatically incentivized to keep the power of the U.S. dollar strong: it's what they profit from.
Second of all, this blog has given me new insight into the dynamic between inflation and interest rates. I've heard quite a lot of negative comments talking about how interest rates under Biden are sky-high, and that's the reason that people won't want to vote for him in the 2024 election. However, this actually came during Trump's term, when the government spent a ton of money to spur the economy and keep it alive during the pandemic (not saying it's a bad thing). Basically, like we learned in class, the people are associating the current economic state of the country with the president, although the country's economy came into his hands from conditions out of his control.
@Mia Sheng
As Evan touched upon above, when the economy does well banks do well. In that way, banks are incentivized to work with other banks to keep the economy strong.
That said, the issue of corruption you raise is an important one to consider. I do think the way the Federal Reserve is set up lets it avoid corruption a bit better than the federal government. Over its history is has been subject to very few scandals compared to the "main" branches of government (LBJ and the Vietnam War, the CIA's "experiments", the NSA's surveillance without warrants, etc.). I think the worst scandals they've ever suffered are insider trading allegations (that actual Congress members engage in every day with impunity anyways).
Of course, I don't know everything about the Fed and the scandals they have suffered so I could be wrong.
https://finance.yahoo.com/news/a-timeline-of-the-federal-reserves-trading-scandal-104415556.html
I agree with others who have commented that the relationship between the Federal Reserve and the executive branch is something to keep an eye on. While the Fed has influence from private banks, the executive branch only has limited influence over day to day operations of the Fed. While the president can nominate individuals to the Board of Governors of the Fed, it needs to be approved by the Senate which is hard to do when the government is polarized. I also agree with Evan and his stance that it is healthier to have separation of powers throughout the government. Allowing the Fed to cooperate with Private Banks allows both parties to have the same incentive of keeping the dollar strong while the President can make decisions if there is something that comes up and is important regarding the Federal Reserve.
However, there is still corruption within the Federal Reserve (like all other parts of government) that needs to be monitored. From insider trading to illegal cooperation with other institutions, members that are closest to current news regarding our economy benefit from making financial decisions before the news breaks out. While this is an issue throughout the government, the Federal Reserve which directly impacts jobs and the strength of the US dollar needs to be monitored and restricted, even if it involves giving up power to check and balance them.
https://www.reuters.com/business/finance/fed-has-yet-face-final-reckoning-two-years-after-trading-scandal-2023-10-04/
https://apnews.com/article/inflation-prices-rates-economy-federal-reserve-jobs-2e94988d686836926c0b7c617c5ff299
I found your blog particularly interesting because it is one of the few blogs that covers economics, something we will learn later in the school year. I'm not even sure if we covered the Federal Reserve System in class. From what I read, the Federal Reserve System serves as the central bank of America, playing a role in influencing economic conditions. This relates to the idea of free enterprise, and how much control the government should have over the economy and market. When you talked about speculations of Trump firing the Board Chairman, I did some research on how Powell got there. The Senate would have to confirm nominees, because nominees need to have the necessary qualifications and aren't solely there to benefit the President's agenda. The Chairman will collaborate with the president and other economic policymakers, but their main responsibility is to make decisions that align with the Federal Reserve's goals, which are to have keep stable prices, maximize employment, etc. So going back to the speculation on Trump, if Trump were able to get a new Chairman, would they try to influence the economic policy to align with Trump's political agenda, or would they maintain their responsibility and adhere to the Federal Reserve's goals.
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