Federal Reserve System Key Roles Term Paper

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During most of the last 20 years (from August 1987 to January 2006), the Fed was headed by Alan Greenspan whose personal economic philosophy to a large extent guided the Fed's actions. One of the features of the Federal Reserve's "accommodative" policies was encouraging low interest rates, which was partly responsible for the longest period of economic expansion in U.S. history in the 1990s.

Assessment of the Efficacy of the Fed's Actions

The impact of all actions by the Fed during the last 20 years has not been without controversy. Encouraging of historic low interest rates and increased liquidity during much of the nineties, while contributing to a "feel good" wealth factor, has also been responsible for an unprecedented "housing bubble" in the U.S. that is currently threatening to burst. The Fed's over-enthusiastic support of the Bush administration's tax-cut policies has also contributed to the biggest current accounts deficit in the country's history. Similarly, although the Fed's role in the handling of the 1987 Stock Market Crash was praise-worthy, it seemed to have done little to prevent the technology stocks-led Stock Market bubble at the end of 1990s.

Appropriate Actions for the Fed in 2006

The Fed has held benchmark interest rates steady at 5.25% for its past three meetings. Although the latest manufacturing index for November 2006 shows its lowest level for three years prompting predictions for a slow-down in the U.S. economic growth in the fourth quarter of 2006, concerns about high core inflation also remain (Schneiderman, 2006).

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Such inflation concerns as indicated in recent speeches by the Fed Chairman, in my opinion, preclude any significant interest rate cuts by the Fed in the near future, while further hikes in interest rates are also unlikely; hence interest rates are expected to remain steady for sometime, at least until mid of next year.

Moreover, profits in U.S. corporate sector have continued to rise, the unemployment rate remains low, and the oil prices have also come down from the record highs in recent months. All of these factors indicate that maintaining the current interest rates should be the most appropriate action by the Fed in the remaining period of 2006 and even the first quarter of next year. On the other hand, slow down in housing sector has given rise to concerns about a major housing bubble burst, and calls for interest rate cuts by the Fed have been made to ward off such a crisis. However, I believe that such action on the part of the Federal Reserve to sustain an unrealistic housing bubble would be inappropriate......

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