Role of Federal Reserve in the US Economy

This article discusses the role of the Federal Reserve in the US economy, including its impact on monetary policy and economic stability. It also explores the Federal Reserve's actions during the 2008 crisis and the need for a more cautious approach in the future.

MACROECONOMICS
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Reply to Ruth Charles
Hi Ruth! I agree with the mandate of the Federal Reserve which was set by the Congress. Also I
concur with your views with the policies of Federal Reserve particularly in the recovery phase of
the economy post the debacle in 2008 coupled with the increasing of the interest rates in 2018.
However, at the same time I would like to bring to the notice the role played by the Federal
Reserve in causing the biggest crisis since the Great Depression of 1929. While there are many
who may pin the blame on investment bankers, investors who invested in the various mortgage
based securities and credit default swaps but the role of Federal Reserve is arguably greater.
This is because the other contributors to the crisis were expected to behave in a irresponsible
manner but the Federal Reserve occupies the position of a regulator and it is expected that
prudent measures would be taken in a timely manner to keep systemic issues from growing.
However, the unfortunate truth is that the Federal Reserve never predicted that a mortgage crisis
is looming even when the rate cycle started reversing in 2005. While, the inability of the Federal
Reserve to estimate the extent of crisis is pardonable but the fact that it never could foresee a
crisis is clearly ridiculous. Having said that there is no denying on the pivotal role that Federal
Reserve plays in the economy but going ahead it would be expected to be more prudent and
conservative in its approach.
Reply to Jada
Jada, I truly admire the pivotal role that Federal Reserve plays in the US economy. Further, I
quite like the examples on how the decision by Federal Reserve with regards to funds rate tends
to have direct and indirect impact on a host of people besides businesses and banks. I also have
concurrent thoughts in relation to the commendable job that Federal Reserve has played since the
onset of the 2008 crisis. In this regards, the quantitative easing was indeed a bold move but was
called for considering the sorry state of affairs at the time. However, I feel an even more prudent
step was to initiate increases in the Fed rate in 2008. This came despite pressure from the
President which highlights the independence of Federal Reserve which is not operational to serve
the narrow political motives but is rather driven by the economic objectives of ensuring low

inflation, maximize employment and maintain economic stability. In the recent time without a
doubt, Federal Reserve has been fairly successful.
However, in the past Federal Reserve has not been equally prudent and the some of the policy
decisions or inactions have led to grave loss to the US economy. But, it is possible that the same
might be attributed to the policy stance and acumen of the people occupying the institution rather
than the institution itself. Hence, going forward, it is imperative that a more cautious approach
should be chosen by the Fed considering the important role it has in the US economy.
Learning Journal
There were a significant number of interesting topics that were covered during the course.
However, I was particularly fascinated by the monetary policy and the role of Federal Reserve in
USA. The various functions that the Federal Reserve has and the extent of impact of the
decisions taken was clearly quite staggering to me. I could totally relate to the impact of change
in Fed Fund Rate not only domestically but also internationally. The realization of this impact
made me understand not only the significance of the decisions and policies of Federal Reserve
but also the difficulty in making those decisions.
Before the course, I have been quite critical of the Federal Reserve about the policies that were
made before the 2008 crisis and the role these played in the overall crisis. But having understood
the impact and their role, I understood how the only way for Fed to make decisions was to
primarily rely on economic data along with its mandate. The demands from various stakeholders
would be so varied that it would be impossible for the Fed to make a policy decision which is
acceptable to everyone. Also, considering the global financial integration, the macro
environment is highly volatile which poses significant challenge. The learning derived from the
course have been immense and is of practical utility to my everyday life. As a result, the course
has been successful in meeting my learning objectives.