Economics

The Federal Reserve System experiences several problems which emanate from its complexity there is a great difference between FEDs structural organization and the practical one. Whereas the former is highly decentralized, the latter is quite centralized. These disconnect between theory and reality is a great impediment for FED, in its pursuit of its monetary policy goals. While policies are formulated against a background of a highly decentralized system, they are supposed to be implemented on a centralized one. Basically, this implies that there should be some ways and means of ensuring that such policies are adjusted and converted if need be, to reflect what is actually on the ground. The FED authority should aim at bridging the gap between paper work and what is taking place on the ground. Such a move will greatly facilitate the achievement of policy goals since both the paper work structure from which the policies are developed and the ground structure where the policies are executed will be in agreement and will thus be working in the same direction. The current difference between the theoretical structure and the reality one also creates an unnecessary time lag between the time the policies are articulated and the time they are implemented and thus their goals achieved. FED should thus change its paper structure in order to reflect what is actually taking place in reality instead of just reflecting what ought to be happening.

FED as an organization, serves both the interest of the public and its own interests as an organization. Most of the monetary policies that FED pursues are mainly aimed at stabilizing the nations economy and in so doing serves the interest of the general public. However, it can hardly achieve these policies without serving its own interests of increasing its own prestige, power and influence. In this case, FED has no alternative but to balance both interests in order to ensure that none hurts the other in any way. Such a balance will ensure that FED attains its monetary policies in the US economy in a more efficient and effective manner. The management and policymakers of FED should ensure that its interests and those of the public do not conflict at all. It must therefore appreciate the fact that the public interest is superior to its own interests and thus all or most of its interests should be aimed at achieving the public interest.

For various reasons, the policies that are developed by FED are greatly affected by the political office holders. This is yet another problem facing the monetary policies of FED. Whereas most of FEDs monetary policies and goals are focused in the long run, the politicians are aware that they will be in a certain political office for only a limited time say four years, and will therefore have most of their goals focused in the short term. This is a problem that is likely to have substantial effect on the FEDs monetary policies and should thus be eliminated as much as possible. For this particular problem to be done away with, FED as an institution should be accorded full autonomy and be freed from the influence of the political office holders whose experience and expertise in monetary issues may be limited. Such a move will enable FED to make decisions and implement policies guided on economic realities prevailing in the country instead of making economic decisions from a political perspective.
 
The open market operations commonly known as OMO, involves selling and buying of securities by the countrys central bank, in order to shape and influence the interest rates course and the growth of credit and money in the market. The bank deposits are thus affected by OMO, since selling and buying of securities by the central bank affects the liquidity levels in the market. The open market operations have an effect on the deposits growth and volume held in the banks. The interest and lending rates that are associated with the bank loans and borrowings are also affected by FED through the open market operations. While participating in the open market operations, FED acts like any other player and thus sells and buys securities in a similar manner as the other buyers and sellers. However, the main objective of FED in participating in this market is not to make any capital gains or revenue, which is the case for the other players, but to control the level of activity in these markets.

The reserve requirements imposed by FED on the commercial banks have a great impact on their operations. This is mainly because the reserve requirements affect the liquid available for the commercial banks. Once FED raises the reserve requirements, the amount that the commercial banks can lend to the market is lowered and so is the activity level. On the other hand, when FED lowers the reserve requirements, the banks are left with more money to lend to the market. Increased lending leads to a higher level of activity since there will be more money and the volume of trade will also be high. The discount rates are yet another tool that is used by FED in regulating the operations of the banks. When FED feels that the rate of inflation is higher than what it ought to be, it raises the discount rates in order to discourage borrowing from the commercial banks and other financial institutions. In turn, this move affects the level of operations of the banks and other financial institutions. On the other hand, when there is deflation in the economy and there is need for more liquid to stimulate growth, FED lowers the discount rates. As a result, people are encouraged to borrow more since it is more affordable to most people to borrow when the discount rates are low. Increased borrowing as a result of reduced discount rates increases the operations level at the banks and other financial institutions.

It is not possible for FED to set any intermediate targets both in terms of interest rates and monetary aggregates because they are not good target variables in that they cannot be easily measured within a short time period and thus overcome any information time lags. It is also not possible for FED to set intermediate targets on them since its control over them is much limited. The influence that FED has on the real rates of interest is quite weak and can thus be in a position to influence the nominal rates. It can therefore not be able to set any targets on interests while it does not have control over them in the first place. Furthermore, the policy of FED of stabilizing rates of interests may not always be consistent with its objectives of maintaining economic growth that is steady.