The Federal Reserve and Inflation
What exactly is the Federal Reserve?
FRB (2006) explains the Federal Reserve System is the central bank of the United States. The purpose of the Fed is to control the monetary system of the United States so that it remains stable, adaptable to change and safer. The Federal Reserve began on December 23, 1913 when President Woodrow Wilson signed the Federal Reserve Act. The Fed’s job is to create influences, which stabilize prices and promote full employment. In addition, the Fed oversees the banking systems for safety and protection of consumers. The two other responsibilities of the Fed are to keep any risk that might arise in the financial system under control and to provide services to the government, public and other institutions (both domestic and foreign) with the most important service being in the United States payment systems.
Do the effects of natural disasters, such as hurricanes, cause inflation or deflation?
According to Olsen (2005) the typical result of natural disasters like hurricanes is inflation. This is due to many factors but one obvious one is that in a significant disaster there is need for many products to replace the losses. This is an unexpected demand and the market is not ready for it. Therefore, the supply is quickly reduced and prices rise. This is especially true in areas like building materials. The United States imports a lot of its building wood from Canada along with many other countries. If Canada responds to a disaster in America (its longtime friend), Japan may find its import quota of wood suddenly hard to fulfill. This will drive prices up in Japan. Another cause of inflation after a hurricane is a sudden drop in consumer confidence. This is a good indicator that inflation will raise.
Olsen (2005) further reports one other point that is really rather uncomfortable to look at is the fact that disasters mean aid money and aid money is a treasure chest to businesspeople who believe alls fair in love and business. Contractors begin charging more money in bids in disaster areas and because there is an oversupply of work with few workers, the price goes up in surrounding areas, which may not have been affected by the disaster. Suppliers also jack-up prices regardless of whether there are shortages or not. Everyone is looking for a piece of the pie.
Who is in charge of the Fed?
FRB (2006) states that even though the Fed is an independent banking system it is still under the control of the United States Congress. The Fed has been described as “independent within the government.” The Fed consists of 12 regional federal banks, which are like corporations. These banks have stock just like regular corporations, but this stock is different in that the stock cannot be sold or used as collateral for a loan and cannot be owned privately (just within the system itself). The stock pays a standardized dividend of 6% per annum. The decisions made by the banks do not have to be ratified by any branch of the government and they do not receive funding from Congress.
Do voters have a say in the implementation of monetary policy?
According to Piger (2005) United States voters do not have a direct say in monetary policy, but indirectly they do through their votes for Congressional election. Since the Congress oversees the Fed the voters say is through decisions made by Congress. However, when voters have a vote for federal import regulation or state import export regulation this will influence the decisions of the Fed. Certainly when the voters change the balance of power in the Congress through voting dominantly for one party as they did in the last election it will have a definite influence on the Fed. This means that if Congress increases funding for education and welfare the Fed may make adjustments. Likewise, increase in taxes on the rich may influence corporate tax reform. When Congress subsidizes farming this will also have an effect. In addition, too much money for housing such as HUD housing projects can move the economy in many ways and the Fed must stabilize those influences.
How is inflation measured?
Piger (2005) expounds one way inflation is measured is through surveys that show public opinion. These surveys like the one in Michigan by the University of Michigan seem to be as accurate as surveys that are more professional. The consumer confidence level seems to be an accurate barometer of how much inflation may increase. The consumer confidence is a gauge of how well consumers think policy makers will perform. The accuracy of this prediction in one way may come true through negotiations of different kinds of pricing contracts like labor contracts. For example, if consumers are members of labor unions and feel that inflation is on the rise, then they may try to meet that possible inflation with increased salaries, which of course become the cause of inflation.
Why is inflation so widely feared?
Inflation is widely feared because it brings increased stress and often a lower lifestyle. In addition, it breeds the fear that we cannot meet our obligations to society or to our families. Bread winners must face yearly increases in education costs and inflation means education is more expensive. Travel or luxury items may become out of reach and this means increased stress and depression. In the extreme, there is a feeling that all is not right with the country and this produces a feeling that we as a nation are losing.
How might a high school student’s experience with inflation differ from an employed urban adult?
A high school student’s concerns are different than an employed urban adult. The high school student may notice that Christmas is not as good as last year or there may not be as much money for this or that but in general the high school student’s life is in a closed world fairly protected (or at least should be protected) from harsher economic realities. However, last year high school students who may not be able to go to the college of their choice may become aware of the reality of inflation.
The employed urban adult on the other hand must deal with rising costs. This will most likely be an indefinite period since not all labor unions are strong and even those that are may not be able to negotiate an inflation increase. Increases in inflation can cause layoffs are on the other hand may cause the increase of working hours if the inflation is an affect of the increase of demand with a reduction of supply.
References
Federal Reserve Board (FRB), (2006) Frequently asked questions, Federal reserve system
Retrieved March 4, 2007 from http://www.federalreserve.gov/generalinfo/faq/
faqfrs.htm#1
Olsen T. (2005) Tribune-Review, Fed official expects growth, Retrieved March 4, 2007 from http://www.pittsburghlive.com/x/pittsburghtrib/s_385893.html
Piger M. J. (November 2005), Monetary trends, Are inflation expectations rising from the ashes?, Retrieved March 4, 2007 from http://research.stlouisfed.org/publications/
mt/20051101/cover.pdf