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6 things that are wrong with the Federal Reserve Bank

The Fed often gets the blame when things go wrong in the economy. It's either slow to react, not transparent enough or not apolitical enough. Here are six ways the Fed could improve its reputation.

In an interview with Knowledge@Wharton, financial analyst Danielle DiMartino Booth talks about some of the problems facing the US central bank, which she has also written a book on (Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America). She discusses how the organisation could improve its operations and approach, touching on six areas that could be improved:

  1. In the past the Fed has taken a 'clear up afterwards' approach to financial crises, and DiMartino Booth says this approach is now 'broken'. The central bank has not taken note of indicators that suggest there are serious economic and financial problems up ahead and hasn't even been reading some of the pertinent indicators – such as junk bond spreads, according to DiMartino Booth.
  2. Central bankers have become very reactive to the financial markets as opposed to being agnostic to them and truly adhering only to safeguarding their dual mandate. DiMartino Booth calls this the 'tail wagging the dog'.
  3. There isn't enough transparency. DiMartino Booth says the Fed is misunderstood by most US citizens: “I think there are way too many conspiracy theories out there about the Fed, precisely because it’s misunderstood. There’s really nothing complex. This is not some kind of secret order of bankers out to destroy the world.”
  4. The Fed didn't act soon enough to introduce its cycle of interest rate rises. It should have acted three years ago, rather than waiting until late last year – even though this could have led to a recession, according to DiMartino Booth.
  5. The structure of the Fed needs to change. It currently includes 12 Federal Reserve Banks. DiMartino Booth says this number could be reduced to 10 and that all should have permanent votes (currently there is a three-year rotation voting system).
  6. DiMartino Booth is also critical of the current Fed president, Janet Yellen, particularly of her focus on maximising employment. She says this “has blinded her to the fact that trying to pull that next marginal worker back into the workforce is going to cost the economy more in the end because of the financial stability that low interest rates bring about”.

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