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In what way does the Federal Reserve have a high degree of instrument independence

In what way does the Federal Reserve have a high degree of instrument independence

Response 1:) Jayne

In what way does the Federal Reserve have a high degree of instrument independence?

The Federal Reserves (Mishkin 2019, p. 375) has two kinds of independence; the instrumental gives the agency the authority to implement monetary policy without interference or influence from other political branches. That independence exists because they are not the governor of the board are appointed for a fourteen-year term but are subjected to termination.

If it has a specific mandate from Congress to achieve “maximum employment and low, stable prices,” then how does the Fed have goal independence?

Mishkin (2019, p. 375) another kind of independence of the Federal Reserve is goal independence. If given a mandate from Congress to achieve “maximum employment and low, stable prices,” the Federal Reserve would have the autonomy to choose how the goals are to be implemented.

Reference:

Mishkin, F. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.ISBN: 978-0134734200

 

Response 2.) Michael

The Federal Reserve (Fed) has a high degree of instrument independence, meaning it can set monetary policy instruments without direct accountability or interference from other government agencies (Mishkin, 2019). Members of the Fed’s Board of Governors serve non-renewable 14-year terms, so they are less influenced by pressure from political leaders.

Congress, in the interest of the public, did issue a dual mandate to the Fed to achieve maximum employment and low, stable prices (Federal Reserve, 2021). However, the Fed still has goal independence because Congress does not determine the specific goals of employment and price levels. The Fed has flexibility in adjusting the specific goals based on changes in the economy, yet, the Fed also recognizes accountability to Congress and the public since Congress can ultimately impact the Fed\’s independence through legislation (Mishkin, 2019).

Federal Reserve. (2021). The fed explained: What the central bank does. Board of Governors of the Federal Reserve System. https://federalreserve.gov/aboutthefed/files/the-f…

Mishkin, F. S. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.

 

 

Response 3.) Lauren

“A financial panic is a sudden, drastic, widespread economic collapse. All at once, many people become convinced their money or investments are at risk and rush to the institutions holding their assets,” (Encyclopedia, n.d.). A financial panic would have a negative effect on the money multiplier and the money supply. When an economy is experiencing some sort of financial panic financial institutions and consumers would be less likely to participate in investment instruments that have high risk levels. Consumers have a history of panic buying during financial panics. Panic buying is a moral hazard that creates unnecessary shortages.

Financial Panic | Encyclopedia.com. (n.d.). Encyclopedia. Retrieved February 13, 2022, from

https://www.encyclopedia.com/history/encyclopedias…

 

Response 4.) Tomeka

The money multiplier measures the effect that a change in banks\’ required reserves has on the overall money supply of an economy. A financial panic is a severe, extensive economic failure. In a financial panic, banks make few loans to raise their leverage ratio, which indicates how the company\’s assets and business operations are financed (\”Financial panic,\” 2019). The leverage ratio also represents the extent to which a business is utilizing borrowed money. It evaluates the company\’s wealth and capital structure. Therefore, a financial panic would likely cause a decline in the money multiplier and the money supply, holding the monetary base constant.

Reference

Financial panic. (2019). Encyclopedia.com | Free Online Encyclopedia. https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/financial-panic

 

Response 5.) Leslie

A disadvantage of supplying loans to banking institutions is that it produces a lack of incentive to guard against issues of possible bank failure. If institutions know that they will have access to Fed loans, they are more likely to take a risk by engaging in risky purchases or risky investments, knowing that the Fed will bail them out if a panic should occur. This may actually make a financial crisis worse than it should have been. In addition, the Fed’s ability to provide discount loans to troubling banks would be a need to keep bank failures from spreading. Finally, while the FDIC’s insurance covers only about 1% of total bank deposits, on the other hand, the Fed has unlimited ability to provide loans to the banking system, which means it can be much more effective in stabilizing the banking system in a panic.

Mishkin, F. S. (2019). The economics of money, banking, and financial markets. (5th ed.). Pearson. ISBN: 978-0134734200

 

Response 6.) Korrickia

According to Mishkin (2019) a few of the disadvantages of utilizing loans to finance institutions in the prevention of bank panics can result in moral hazards. The discontinuation of the economic system\’s ability to allocate and distribute enough capital for productions, investments, and spending are the consequences. Lastly, this can lead to what Mishkin (2019) describes as a zero-lower-bond issue. This is a monetary policy strategy the Fed\’s may employ for a short-term where the interest rate is lowered to zero to manipulate the economy (Mitchell, 2021).

Reference

Mitchell, C. (2021, April 6). Zero bound. Investopedia. Zero-Bound Definition (investopedia.com) (Links to an external site.)

 

Response 7.) Lauren

According to The Federal Reserve Education website, “The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment,” (Federal Reserve, para. 3). The Fed’s balance sheet contains the Federal Reserve assets and liabilities. The Fed’s liabilities consist of currency currently being used by the public, bank deposits, and cash held in vaults. Assets consist of government securities and discount loans. During an economic crisis the Fed’s balance sheet is an important aspect of monetary policy because the financial document provides critical information about the off balance of the cash flow.

Federal Reserve. (n.d.). Monetary Policy Basics. Federal Reserve Education. Retrieved February 13, 2022, from

https://www.federalreserveeducation.org/about-the-…

Mishkin, F. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson. ISBN:

978-0134734200

 

Response 8.) Michael

During an economic crisis, the composition of the Fed’s balance sheet can be an important aspect of monetary policy. For example, between 2008 and 2012, the Fed established large-scale asset purchase program to lower interest rates and stimulate investment spending (Mishkin, 2019). Expanding the balance sheet or, quantitative easing, will not necessarily increase the money supply or bank lending, because many banks will choose to increase reserves instead (Mishkin, 2019).

Use of these balance sheet adjustments can be effective in stimulating the economy by increasing liquidity and keeping long-term interest rates low (Mishkin, 2019).

Mishkin, F. S. (2019). The economics of money, banking, and financial markets (5th ed.). Pearson.

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In what way does the Federal Reserve have a high degree of instrument independence

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