United States Monetary Policy
Congress has handed over the responsibility for monetary to the Federal Reserve, also known as the Fed, but retains oversight responsibilities in order to ensure that the Federal Reserve adheres to the statutory mandate of stable prices, moderate long-term rates of interest, as well as, maximum employment (Labonte, 2014). The responsibilities of the Fed as the country’s central bank are classified into four: monetary policy, supervision of particular types of banks and financial institutions for soundness and safety, provision of emergency liquidity through the function of the lender of last resort, and the provision of services of the payment system to financial institutions, as well as, the government (Labonte, 2014). The monetary role of the Federal Reserve necessitates aggregate demand management. The Federal Reserve defines monetary policy as the measures it undertakes in order to influence the cost and availability of credit and money to enhance the objectives mandated by Congress, which is maximum sustainable employment and a stable price level (Appelbaum, 2014). Since the expectations of businesses as capital goods purchasers and households as consumers exert an essential influence on the main section of spending in America, and the expectations are influenced in essential ways by the Federal Reserve’s actions, a wider definition would involve the policies, directives, forecasts of the economy, statements, and other actions by the Federal Reserve, particularly those associated with or made by country’s central banker, the chairman of the Fed’s Board of Governors (Labonte, 2014). The Federal Open Market Committee holds meetings from time to time to decide on whether to change or maintain the present stance of monetary policy. This paper seeks to compare the policy changes and differences between former Federal Reserve System Chair Ben Bernanke and the current Chair Janet Yellen.
Before making the comparison between the two chairs of the Fed, it is important to note the changes in policy. In recent years, the Fed has made considerable changes to its monetary policymaking framework by offering greater clarity concerning its objectives, intentions concerning the monetary policy use such as asset purchases and forward guidance (nontraditional policy tools), in the search of those goals, as well as, its wider policy strategy (English, Lopez-Salido, & Tetlow, 2013). The alterations have led to the understanding of the most efficient means of implementing monetary policy by economists and a response to certain problems that financial crisis and its effect present, especially the efficient lower bound on interest rates. Some foreign central banks have also made similar inventions and innovations as a reaction to such developments. The Fed has moved nearer to flexible inflation targeting. However, the approach of Fed involves a balanced concern with two goals and the application of a flexible possibility over which policy targets to enhance those goals (English, Lopez-Salido, & Tetlow, 2013). Additional changes in the frameworks of central banks may be required to deal with challenges presented by the global financial crisis. For instance, various economists have recommended that the sustained time at the efficient lower bound presents a need for the financial institutions to set up a distinct policy goal including a nominal income target and higher inflation target. Such changes have presented potential costs and benefits in the U.S. economy (English, Lopez-Salido, & Tetlow, 2013). There is, therefore, important to check on this issue broadly.
Economists have attempted to compare the two in terms of changes and differences in the Federal Reserve. A majority of people noted that Janet Yellen would just be like Ben Bernanke after she became the chair of the Fed. However, this is just not true, and is, in fact, not possible according to Brusca (2014). It is important to note that Yellen was the first woman to become the chair of the Federal Reserve. The testimony of Yellen paved the path for this conclusion. Yellen spoke of the policy continuity, and this reminded people that she has been an associate of the board of governors of the Fed and a member of the Federal Open Market Committee (FOMC) in this hard time and among the policy architects. However, it is not unexpected for people to question why the two were often on the same page and whether they are same-minded. Brusca (2014) uses the word cyclical dove to label Bernanke as his dovish nature on policy started after he pursued a career in understanding the Great Depression, and leaves Americans to question what went wrong. Bernanke had noted that the main mistake in the policy was eliminating stimulus too soon. The policy’s driving force under Ben Bernanke was to make it stimulative and maintain this for a long period, above usual tolerance. This is not just a philosophy or idea, but a policy created after a lot of time of academic study (Brusca, 2014). It is important to note that even after considerable efforts of investigation by reporters during the time that Bernanke was the chair of the Fed; nobody was in a position to identify his political proclivities. According to Brusca (2014), he just was not an ideologue.
Unlike Bernanke, Yellen is a Democrat. According to Brusca (2014), democrats believe in the legal role of government involvement and in the ineffectiveness of economic systems. Therefore, Yellen is, in this case, a structural dove. Yellen and Bernanke were simply on the same page due to the economy’s condition, the financial crisis. Taking into consideration the likely course of action by Yellen, the fact that comes out is that it was not only ideology but also the economy’s demands need to be taken into consideration (Brusca, 2014). When Paul Volcker, for instance, took over the economy’s demand were clear, as well as, the way for the Federal Reserve. For Yellen, this appears to be far from true. Besides this, it is true no longer true that Yellen’s, Bernanke’s and other members of FOMC policies are important for today. As the country progresses in the process of recovery, the concern of what Ben would do would become less relevant and obvious. Under Bernanke’s leadership, several innovative policies were put in place, which have been stopped one after the other since the policies have become less important. During his time, there was the adoption of a long term guidepost for inflation, as well as, a metric to evaluate unemployment appropriateness. There seemed to be rules and regulations under Bernanke. Brusca (2014) notes that maybe there was a lot of the illusion of rules and regulations than the substance. The issue of unemployment is still persistent as always, and the Federal Reserve is particularly taking into account to allow inflation to go beyond the target to even a rate of 2.5% under some conditions.
Even though, in her testimony, Yellen claimed to be a central banker who does not want to bring any surprises to the public, the current Federal Reserve does not have guidelines. One cannot identify the one single factor that drives policy. The Fed has the idea of the long term inflation. However, it does not have commitment to get attain that rate. The Fed’s unemployment metric is only for show. Whether Janet Yellen agrees with the policy of Bernanke or not, the Bernanke’s policies have brought American citizens to a split in the road, a split that has come up so fast (Brusca, 2014). The Federal Reserve’s strange expression of being extremely discontented with the unemployment rate has made matters somewhat worse and regardless of that getting involved in decreasing operation to remove stimulus. The Federal Reserve targeted significant asset purchases at improving the country’s economy and the rate of fed-funds at keeping the rate of unemployment lower. However, the Fed is now in a peculiar state of having a policy that works against the anti-unemployment expression or rhetoric. Making promises not to increase the rate of fed-funds is not much, particularly because the rate of unemployment is about to fall under consultation. Fed’s forward-guidance requirements have, in fact, changed a total of four times. This leaves no credibility for anyone. People are left with no guidelines and are in the opinion region under Janet Yellen. This means that Ben and Janet had an agreement before, which is presently disentangling. Yellen needs a proper plan B that is there is a need for her to break with past policies. This is because policy continuity is a perilous concept during these modern times (Brusca, 2014).
Weisman & Spector (2013) outlines some important points worth noting about monetary policy under Janet Yellen. The Federal Reserve’s monetary policy of the United States under Yellen is expected to be widely similar to that of Ben Bernanke, but it is expected to have some differences. For instance, Yellen is more likely to stress her own views more and consensus less, which is expected to result in more transparency, as well as, more forceful and clearer forward guidance. Unlike Ben Bernanke, Janet Yellen is a powerful advocate of integrating rules-based strategies to determine monetary accommodation (Weisman & Spector, 2013). Yellen is likely to look for a wide-based development in indicators of labor market before she recommends that quantitative easing should be narrowed. Yellen’s academic research backs her principle that the high rate of unemployment since the global financial crisis has been highly cyclical instead of structural. This implies that Yellen may put a heavier weight on one section of the Fed’s dual mandate that is employment than on the other section, which is price stability (Weisman & Spector, 2013).
Whereas the nomination of Yellen has usually been viewed as a symbol of policy continuity, she is expected to be different from Ben Bernanke who usually spoke last in policy meetings in an attempt to achieve greater consensus. Yellen is expected to be inclined to identify her opinion and view with her own voice; nevertheless she is not likely to lead the Fed in a centralized manner (Weisman & Spector, 2013). Just like Bernanke, Yellen is expected to uphold a friendly ambiance in which other members of FOC are allowed to express their ideas and opinions. Instead of seeking consensus at the policy design or transparency expense, Yellen is likely to tolerate opposition if that can result in better results. Consequently, Yellen may lie somewhere between Bernanke’s and Greenspan’s in terms of the process of policymaking (Weisman & Spector, 2013). Setting the rate of federal funds is usually regarded as the basic role of the U.S. chief central banker. However, with the targeted rate almost zero and with the possibility to stay there for as long as inflationary expectations and labor markets remain subdued, Yellen’s role may be more about using other tools of monetary policy at her disposal, that is forward guidance and quantitative easing (Goldfarb, 2012).
In conclusion, the role of the Fed has increased and come under rising investigation in the wake of the global financial crisis (Sergie, 2014). The policy of the Fed of maintaining low interest rates in the beginning of 2000s that led to less costly mortgages is stated by a majority of economists as a significant factor that led to increased prices of houses, even though some do not agree to this. Lately, the Federal Reserve has been questioned for its broad involvement in the bond markets, such as three cycles of quantitative easing that aided in sustaining the financial recovery, but changed the Federal Reserve into a vehicle of investment with the power to make money (Sergie, 2014). In December, 2013, the assets of the Fed increased to more than 4 trillion dollars from a value of 869 billion dollars in 2007. Therefore, Yellen needs a proper plan B that is there is a need for her to break with past policies. This is because policy continuity is a perilous concept during these modern times (Brusca, 2014). Even though many people expect that she will follow the policy of Bernanke, there are those who believe that she is bright enough to comprehend that running sequential busts and bubbles is possibly sub-optimal policy (Mattich, 2014)
Appelbaum, B. (2014, March 19). Fed Cuts Bond Buying by Another $10 Billion. The New York Times. Retrieved March 24, 2014, from http://www.nytimes.com/2014/03/20/business/fed-cuts-bond-purchases-by-another-10-billion-as-expected.html?_r=0
English, W., Lopez-Salido, D., & Tetlow, R. (2013, November 7). Finance and Economics Discussion Series. FRB: FEDS Abstract 2013-76. Retrieved March 23, 2014, from http://www.federalreserve.gov/pubs/feds/2013/201376/201376abs.html
Goldfarb, Z. (2012, September 24). Under Ben Bernanke, a more open and forceful Federal Reserve. Washington Post. Retrieved March 23, 2014, from http://www.washingtonpost.com/business/economy/under-ben-bernanke-a-more-open-and-forceful-federal-reserve/2012/09/23/52f3a1ae-03e1-11e2-8102-ebee9c66e190_story.html
Labonte, M. (2014, January 7). CRS Report for Congress Prepared for Members and Committees of Congress Monetary Policy and the Federal Reserve: Current Policy and Conditions . Congressional Research Service. Retrieved March 23, 2014, from http://www.fas.org/sgp/crs/misc/RL30354.pdf
Sergie, M. (2013, December 23). The Role of the U.S. Federal Reserve. Council on Foreign Relations. Retrieved March 23, 2014, from http://www.cfr.org/international-finance/role-us-federal-reserve/p21020
Weisman, E.S., & Spector R. (2013, November 12). Insights | MFS. Insights | MFS. Retrieved March 21, 2014, from https://www.mfs.com/wps/portal/mfsmobile/insights?clearPortletSession=true
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