The Federal Reserve as Central Bank

A comparison of the Bank of Japan and the Federal Reserve in The Economist ("The rewards of independence: central banks: America v. Japan," January 25, 1992) notes first that studies have shown that when central banks are independent of political influence, they tend to deliver lower rates of inflation. They accomplish this without simply costing jobs, for countries with independent central banks do not, on average, have higher unemployment rates than others, with many having less. Under such systems, workers and employers adjust their wage-setting more readily to the climate of tight money because they believe that the policymakers have a commitment to low inflation. On the other hand, when politicians have a hand in setting monetary policy, they are always tempted to engineer a boom ahead of an election, and thus anti-inflation pledges lack credibility. Workers thus continue to demand high pay raises while bosses continue to concede them. The author concludes: "To make monetary policy credible, and hence more effective, it must be put i

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said that until the debt matter was improved, there was little that the Federal reserve or Congress could do to change the economic situation (Gosselin, 1992). Business Week reported in July (July 20, 1992) on the efforts being undertaken by the Federal Reserve to do what it could about the economic problems facing the country. After the release of the July employment report which showed job losses of 117,000 in the previous quarter, the Federal Reserve cut its official discount rate for the seventh time since it hit its peak in December 1990. The Fed also trimmed the market-moving federal funds for the seventeenth time since the beginning of the recession in July 1990. The discount rate then stood at three percent, and the new target for the federal funds rate was three-and-one-quarter percent. These levels had not been seen since the Kennedy Administration. The rate cuts were expected to keep the economy moving along slowly during the summer, but growth was considered unlikely. In response, commercial banks cut their prime rate from six-and-one-half percent to six percent, thus lowering the cost of various consumer loans. Short-term market rates were reduced in tandem with the federal funds rate, and long-term rates als
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Approximate Word count = 2166
Approximate Pages = 9 (250 words per page)

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