The Federal Reserve and Brexit

Emilia Marroquin – Honorbound –

The Federal Reserve has become an important part of American life. How did this undemocratic system gain so much power over the people? Charles Wheelan explains, “The Federal Reserve controls the money supply and therefore the credit tap for the economy…thus, the Fed can use monetary policy to counteract economic downturns”[1]. Simply, the Federal Reserve steers our economy away from any type of economic downturn. But why do so many people oppose the Feds from controlling our money? Aren’t they protecting us from downturns? One example an anti-Fed arguer might say is that the Fed is too independent from the government and that the money supply should be regulated by Congress. The problem with this argument is that the Fed needs to be independent from the government in order to maintain our money supply accordingly. Dan Blystone explains that a government-controlled Fed “could lead to high inflation and fail to control unemployment over the long-term” due to politcal influence; therefore, the independence of the Federal Reserve leads to better economic decisions for the long term and  “can also make it easier to execute policies that are politically unpopular but serve a greater public interest”[2]. The autonomy of the Federal Reserve serves as a positive system for the economy of the U.S.and the overall global economy because of its lack of political influence and its decisions based on what’s best for the country rather than popular opinion, making it able to assess and control big economic downturns like the powerful influence of Brexit.

Brexit has become a popular topic in global economics as it affects not only Britain but also other countries like the USA. Brexit “is the nickname for a British exit from the European Union”[3]. How will the U.S. economy be affected by this decision? If Britain decides to exit the Union, it is most likely that it will undergo a recession, decreasing U.S. exports and overall aggregate demand. All this put together can ultimately lead the U.S. into a recession, too, unless the government or Feds work to better our economy through their policies. So how will the Feds be able to control the repercussions following the decision?   Wheelan describes, “The Fed must feed just the right amount of credit to the economy to keep it growing steadily”[4] The Feds have the power to control our money supply through monetary policy; therefore, Janet Yellin, the chairwoman of the Federal Reserve, and the other board members are considering the possibility of waiting on raising the interest rate due to Brexit. This deliberate decision, whether it be unpopular or popular among the U.S., shows the Fed’s capability to avert the U.S. from being affected negatively from the economic downturns of other countries without government interference.

Brexit is one example of many economic problems that affect the U.S. economy, thus, it is vital to have a central bank to control our money supply and protect the economy; albeit, sometimes the Fed fails in stopping a recession or inflation, the economy will come back through its policies made out of concern for the well being of the country and sans political and democratic influence. Ultimately, “the Federal Reserve has tools with a more direct impact on the global economy;”therefore, “everyone agrees that what the Fed does matters enormously”[5].

[1] Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: Norton, 2010.

[2] Blystone, Dan. “Why Is The Federal Reserve Independent? | Investopedia.” Investopedia. April 15, 2015. Accessed June 22, 2016. http://www.investopedia.com/articles/investing/041515/why-federal-reserve-independent.asp.

[3] Taub, Amanda. “What Is ‘Brexit’? A Look at the Debate and Its Wider Meaning.” The New York Times. June 20, 2016. Accessed June 21, 2016. http://www.nytimes.com/2016/06/21/world/europe/brexit-britain-eu-explained.html?_r=0.

[4] Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: Norton, 2010.

[5] Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: Norton, 2010.

Fig. 1 The Spectator. “Brexit Could Leave Britain with the Worst.” Digital image. The Spectator. 2016. Accessed June 22, 2016. http://blogs.spectator.co.uk/2016/06/brexit-leave-britain-worst-worlds-like-norway/.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s