Imaginary Treasury Issue
The Federal Reserve System (the Fed) is the central bank of the United States which was founded by Congress in 1913. Its primary responsibilities are conducting the nation’s monetary policy; supervising and regulating banking institutions and protecting the credit rights of consumers; maintaining the stability of the financial system; and providing certain financial services to the U.S. government, the public, financial institutions, and foreign official institutions (). The Fed consists of twelve administrative districts and banks inclusive of major cities across the United States. Each of these Federal Reserve Banks gathers information regarding the current economic conditions for their respective areas which is summarized by district and sector in the Beige Book. The Beige Book is published eight times a year and the overall report from the twelve districts is prepared by a designated Federal Reserve Bank on a rotating basis. These reports are based on economic data from seven major categories: Consumer Spending, Manufacturing, Real Estate & Construction, Tourism & Services, Banking, Natural Resources & Agriculture, and Labor Markets, Wages, & Prices ( 1997).
The United States Federal Reserve System are said to be exposed with different issues concerning treasuries. In this particular report, the imaginary treasury issue that would be given emphasis will be in terms of Treasury bond issues, specifically municipal bonds.
Municipal bonds, or municipal securities, represent a promise by state or local governmental units (called the issuers) or other qualified issuers to repay to lenders (investors) an amount of money borrowed, called principal, along with interest according to a fixed schedule. Municipal bonds generally are repaid, or mature, anywhere from one to 40 years from the date they are issued.
The municipal bond market is composed of thousands of dedicated professionals throughout the United States who have the diverse skills needed to raise money in the capital markets for state and local governments. Distinct roles are played by state and local government officials, public finance investment bankers, underwriters, salespeople, traders, analysts, lawyers, financial advisors, rating agencies, insurers, commercial bankers, investors, brokers, common goal of providing funds to state and local government units to build needed public projects and infrastructure.
Municipal bonds are also commonly called tax-exempts, because the interest paid to the investor is subject neither to federal income taxes nor (sometimes) to state or local taxation. With regard to tax exemption, it must be noted that each household and organization’s tax status is unique and different. Although this book delineates the general principles of municipal bonds, investors should consult with their own financial advisors when considering the purchase or sale of municipal securities.
There has developed, however, a market for taxable municipal bonds, issued by state and local governments or other qualified issuers and on which the interest income is taxable. This is because there are certain uses for municipal bonds that are not eligible for tax exemption due to limiting provisions in the U.S. tax code. Throughout this book, references to municipal bonds are to tax exempt securities, except where it is expressly stated that they are taxable.
One of the issues that can be attached with this Treasury bond is about the treasury debt. The main advantage of this Treasury bond issue is it enables the Federal Reserve to enhance their policies in accordance with this issue. Through this, the Federal Reserve has been able to modify its techniques for giving reserves.
Considering substitutes to Treasury securities for the Federal Reserve can also be considered an advantage since it may provide interesting intellectual challenge. this issue may involves thinking about the price discovery factors in financial markets, the public good elements of the Treasury debt–its use as a benchmark and in risk management–and the interaction of those attributes with Federal Reserve movement. For instance, to conserve the value of any public good, the Federal Reserve System might want to reduce its holdings of Treasury debt more quickly than the Treasury pays it down. In this manner, there is a tendency that it may raise issues about the nature of the central bank and the interaction of its balance sheet adjustments with credit and resource allocation and with the political process.
Furthermore, through this issue, the Federal Reserve may be able to determine some possible alternatives which may tend to emphasize the maintenance of liquidity and safety. The choices may include operating in markets for safe, private instruments, liquid and like high quality commercial paper and the responsibilities of the government sponsored enterprises. The Federal Reserve may also include the process that may enable short-term loaned to financial intermediated against collateral which may use intermediaries to stand between the Federal Reserve and final borrowers. This can be considered as a safe process since they are two-name paper, in which the Federal Reserve can rely on both the collateral for repayment and borrowing intermediary.
Moreover, a shift fro Treasury to private securities may have a tendency to open the Federal reserve to attempts to use political pressure and to influence its asset holdings–at least the composition of those holdings, though not essentially the overall size of the portfolio and the viewpoint of policy.
One of the consequences of this particular issue is that, because pf the economic weakness and fiscal policy actions, the surpluses that had market actual proposed unified budgets may turned into deficits. In this regard, the robust growth of potential output and a modicum of fiscal aspects may have a tendency to cause surpluses to re-emerge before very long. In that circumstance, the Federal Reserve may not be able to identify the most effective way to solve such issue. Providing the tendency fro treasury securities to be locked up in a certain portfolio, and even the short-lived surpluses may significantly reduces the liquidity of the Treasury security markets and impacted the conduct on its holdings of Treasury securities. In addition, another consequence is that, the Federal Reserve System may not be able to solve such issue which may affect the overall performance of the system.
Conclusion
In this issue, there can be stressed two points. The first one is that from the Federal Reserve point of view, this is a technical issue. The pay down of treasury debt may not in any manner impair the ability of the Federal Open Market Committee to have a target for the federal funds rate which is as closely related to the future course of the economy. On the other hand, the committee will be able to continue to project this target to be achieved within very tight tolerances.
Credit:ivythesis.typepad.com
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