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Unformatted text preview: 7/7/2009 1 FEDERAL RESERVE INDEPENDENCE FEDERAL RESERVE INDEPENDENCE & & MONETARY POLICY, PART I MONETARY POLICY, PART I JUNE 30 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Central Bank Independence: The Debate b Theories of Central Bank Behavior b Introduction to the Conduct of Monetary Policy b The Fed’s Balance Sheet b Open Market Operations b The Market for Reserves b Review/Q&A Setup Recall from last time… b Federal Reserve Independence b Instrument Independence - The ability of the central bank to set monetary policy instruments. b Goal Independence - The ability of the central bank to set the goals of monetary policy. b Evidence suggests that the Fed is free along both dimensions. b Congressional and Presidential Control b Congress can enact legislation to gain control of the Fed, a threat wielded as needed. From the Wall Street Journal … From h i s perch h igh atop the pal atial Dallas Fe deral Re serve B ank , overlooking what he calls "t he m ost m odern, efficient city in America," Richard Fi sher says h e i s always on the l ookout for ri si ng prices. B ut th at's n ot what's worrying the ban k's presi dent ri ght now. H i s bi gger concern these days would seem to be wh at h e cal ls "the pe rception of risk " that h as be en created by the Fe d's pu rchases of Tre asury bonds, m ortgage-backed securities and Fan n i e Mae paper. Mr. Fisher acknowledges t hat events in t he financial m arkets last year required som e unusual Fed act ion in t he comm ercial lending m arket. But he says t he longer-term debt , part icularly the T reasurys, is m aking investors nervous. The looming challenge, he says, is t o reassure m arkets t hat t he Fed is not going t o be "t he handm aiden" t o fiscal profligacy. "I think the trick here is t o assist t he funct ioning of t he private m arkets wit hout signaling in any way, shape or form t hat t he Federal Reserve will be part y t o m onet izing fiscal largess, deficit s or t he st im ulus program." From the Wall Street Journal … b The article continues… …“Voi ce s l ike Mr. Fi sh er's can be a probl em for th e pol iticians , which m ay be why recent ly th e re h ave be en ru mbli ngs i n Washington about revok ing the au tom atic FO MC m e m be rship th at comes wi th be ing a regional ban k president. Does Mr. Fisher have any t hought s about t hat ? Th i s i s n oth ing n ew, h e poi nts ou t , briefly reviewing t he hist ory of t he polit ical st ruggle over m onet ary policy in t he U.S. "T he reason why t he banks were put in t he m ix by [P resident Woodrow] W ilson in 1913, th e re ason i t was structured th e way i t was structured, was so th at you cou ld offset th e pol itical powe r of Washin gton and th e m oney ce nter i n Ne w York wi th th e re gional ban ks. Th e y represented Mai n S treet.” " Now we h ave th i s gre at popu list fe rvor and th e ban ks are arguing for Mai n S treet , largely. I have heard t hese argum ent s before and st udied t he hist ory. I am not losing a lot of largely....
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This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.
- Summer '08
- Monetary Policy