inner workings of the Federal Reserve and its regulatory tools and mechanisms
This chapter provides an insight into the inner workings of the Federal Reserve and its regulatory tools and mechanisms. It is worth noting that the “easy money” as the author describes can make consumers demand the things that the economy cannot produce, and this results in inflation. I concur with the author in that “The Federal Reserve has tools with more direct impact on the global economy than any other institution in the world, public or private” (Wheelan, 219). The Fed has the power to influence the direction of the global economy, including shaping the country’s employment levels. I have learned that the fundamental thing the Fed can do to increase what a country can produce is by increasing number working hours, employing new workers, using machines to produce goods, and using innovation and technology.
The author is true in arguing that the Fed is a credit tap of the economy, which “controls the money supply… (Wheelan, 219)” by either reducing or increasing the interest rates. I agree that one of the Federate Reserve’s tools is controlling the money in circulation in the economy by using interest rates. It is delightful to note that financial control that the Federal Reserve successfully exercises its control hinges around the forces of demand and supply. As the author rightfully notes, “Fed moves interest rates by making changes in the quantity of funds available to commercial banks…” (Wheelan, 220)I believe this is the ultimate role of the Fed, which acts as a monitor of all the commercial banks. It is also intuitive to learn that the Fed unleashes other tools to prevent commercial banks from circumventing the rules concerning the demand and supply of money in the economy. As the author notes, “the second important tool in the Fed’s money supply kit is the federal funds rate… (Wheelan, 221)” which is a specific interest rate that one commercial bank charges another bank.
The workings of the federal bank has one ultimate goal of facilitating a “sustainable pace of economic growth” (Wheelan, 235) and using the monetary tool to meet a specific economic target. While this job looks easy, it presents complex and tough decisions to the chairman of the Federal Reserve and the governors. Mistakes in regulating money circulation through wrong interest rate margins can bring a rippling economic effect on local and international economies. As the article shows, one of the devastating impacts of wrong choices and indecisions of the Federal Reserve is inflation which, when it sets in, it isn’t straightforward to control. As the author notes, “Inflation is bad; deflation, or steadily falling prices, is much worse (Wheelan, 241)”. Deflation makes “consumers worse off because it brings worse economic cycle” (Wheelan, 242). As the author indicates, Federal Reserves have a greater responsibility of cushioning economy against the effects of inflation and deflation.
It is worth noting that careless decisions of the Federal Reserve may set a country into a dangerous path of inflation and deflation, putting a country into abyss that even the monetary policies alone may not salvage. As the author correctly states that the fiscal policies are necessary but risky endeavor, countries across the world tend to exercise extreme caution when managing monetary policies. Reading through the article, I have learned that if monetary policies are “done right, it facilitates economic growth and cushions the economy from shocks that might otherwise wreak havoc” (Wheelan, 242). But if the policies are left in the hands of inexperienced people, it can cause economic pain and misery. This article provides, in-depth understanding of inner workings of Federal Reserves and its ultimate role in regulating commercial banks and stabilizing the economy as well as managing inflation and deflation.