Should the Fed Reserve Be Subjugated to Political Influence - Assignment Example

The notion for congress to subject the federal reserve to greater political accountability implies a big risk measure the fed must consider. According to the market view of trump, “bond markets are pricing in faster growth and inflation since the election, with 10-year treasury yields rising much more than shorted-dated yields”. With the recently president-elect, Trumpflation sets short term goals to boost inflation and economic growth, while having no long-term impact on the real economy.

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With the cyclical boom reflected across the equity market at a stock level prestige, we see that cyclical companies like car manufactures and airlines easily averaged over the SP500, while the defensive companies who are better suited to counter recession lags. Although critics argued that the long-term treasury securities are a flawed measure of hope, trumpflation’s attempt to increase the 10-year treasury rate implies a decrease in the security’s price.

As a result, because this takes time value of money into account, the coupon value will be worth less by the maturity date. If the fed is further subjected to political control, increasing inflation can hurt the coupon holders by decreasing the real interest rate at which they receive on their coupon. One of the biggest reason to free the fed from political pressure is its monetary policy. To better achieve better inflation outcomes without compromising economic growth long term, central banks must be able to conduct monetary policy operations away from political influence.

Since the goal of the monetary policy is subjected to time lag, it should be ideal to say that the policymakers need to take a longer-term perspective into account; in retrospect, political pressure can subject the “central bank to overstimulate the economy to achieve short term outputs and employment gains that exceed the country’s underlying potential”. For example, during Janet Yellen’s testify on oversight operations back in 2016, she mentions that with more people coming back to the labor force (180,000 jobs per month) and with inflation under control just below 2%, there is no upward pressure on inflation.

However, if short term goal was taken into consideration and the monetary policy being an accommodative, it can subject the economy to overheat. As a result, this can lead to a faster increase of interest rate that can jeopardize the ideal economic situation the US needs to be in. In addition to its monetary policy, the importance of the Fed’s independence allows it to monitor the effect of its flexibility to counter congressional mandate. The biggest fear of potential political oversight of the Fed’s operations is the abuse of government power.

Allowing political control gives the Congress authority to force the Federal reserve to buy its debt by printing more money, which in turn causes hyperinflation for the people and high volatility for the market. The power of independence of the central bank is a big factor in determining the nation’s economic power. According to Janet Yellen testimony on the independence of the central bank, she stated that independent central banks show better economical outcomes, and these banks has proved to further display a more positive macroeconomic performance.

For example, the biggest consumer inflated country is proven currently to be Venezuela, with 700% inflation rate. Under a socialist government, its central banks’ independence is controlled by its government, and having numerous sanctions on its oil reserve on top of massive amount of debt threw the country into an economic mess. As a result, the president had to devalue the bolivars by more than 60% in hoping to bridge the gap between the official rate and its black-market rate.

Domestically, a good example of the Fed and Government coagulation was seen during the Greta Depression. Between 1928-1929, with the” support” of Government authority, the fed attempted to raise interest rate to limit speculation in the securities market. However, this action slowed the economy and triggered a nation’s recession. As proven multiple times in the past domestically and internationally, one can only hope that the Federal reserve can be left independent of congressional mandate.