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econ423lec9 - The Plan for Today Central Bank Independence...

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7/7/2009 1 FEDERAL RESERVE INDEPENDENCE FEDERAL RESERVE INDEPENDENCE & MONETARY POLICY, PART I JUNE 30 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today box2 Central Bank Independence: The Debate box5 Theories of Central Bank Behavior box2 Introduction to the Conduct of Monetary Policy box5 The Fed’s Balance Sheet box5 Open Market Operations box5 The Market for Reserves box2 Review/Q&A Setup Recall from last time… box2 Federal Reserve Independence box5 Instrument Independence -The ability of the central bank to set monetary policy instruments. box5 Goal Independence - The ability of the central bank to set the goals of monetary policy. box5 Evidence suggests that the Fed is free along both dimensions. box2 Congressional and Presidential Control box5 Congress can enact legislation to gain control of the Fed, a threat wielded as needed. From the Wall Street Journal From his perch high atop the palatial Dallas Federal Reserve Bank , overlooking what he calls "the most modern, efficient city in America," Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper. Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program." From the Wall Street Journal box2 The article continues… …“Voices like Mr. Fisher's can be a problem for the politicians , which may be why recently there have been rumblings in Washington about revoking the automatic FOMC membership that comes with being a regional bank president. Does Mr. Fisher have any thoughts about that? This is nothing new, he points out , briefly reviewing the history of the political struggle over monetary policy in the U.S. "The reason why the banks were put in the mix by [President Woodrow] Wilson in 1913, the reason it was structured the way it was structured, was so that you could offset the political power of Washington and the money center in New York with the regional banks. They represented Main Street.” " Now we have this great populist fervor and the banks are arguing for Main Street , largely. I have heard these arguments before and studied the history. I am not losing a lot of sleep over it," he says with a defiant Texas twang that I had not previously detected. " I don't
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