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12 18 2015 | by Victor Xing | Central Banks

What would happen if central banks cease to exist?

Services provided by central banks are often deeply intertwined with the financial sector.  If they are “phased out” in an abrupt manner, immediate impacts to the financial sector and the greater economy will be severe.  The following services are currently performed by the U.S. Federal Reserve:
Abrupt removal of the Federal Reserve will leave the Bureau of Engraving and Printingwithout banknote orders for the upcoming fiscal year (please see: how do governments decide how many banknotes to print?), and banks needing cash will have no source to obtain them (The Federal Reserve’s Role in Cash Distribution).  An entirely new agency will need to be setup to take over the services once performed by the FED.
In terms of monetary policy, it will be difficult to sort out what will happen to the Federal Reserve’s $4.2 trillion System Open Market Account Holdings
  • If these assets were to be sold, then financial conditions will experience an abrupt and massive tightening – imagine unwinding the effects of multiple quantitative easing programs
  • If these assets were to be kept, then the shrinking balance sheet without reinvestment will still lead to tighter financial conditions
If central banks cease to exist, FED's SOMA holdings will need to find a new home
Aside from the FED’s balance sheet, ceding interest rate control to financial markets will also entail significant changes (what happens if Fed declares interest rates will have no restrictions and will be determined solely by market?), but as I’ve previously stated, I also expect benefits from market-driven interest rates.
Nevertheless, global currency markets will experience a period of significant volatility amid uncertainties of dollar valuation.  United States Department of the Treasury had a history of forcing the Federal Reserve to keep rates low to monetize the nation’s debt obligation (please see why can’t the USA print more money to pay off their debt?), and the Treasury department taking over control over money supply may send a very negative message to global financial institutions about dollar valuation.
Finally, the Federal Reserve’s regulatory functions will likely be transferred to the various federal agencies.
Central banks cease to exist will leave vast vacuums in the functioning of our financial market.
Original Quora article

Next article12 17 2015 | by Victor Xing | Central Banks

Is it possible for Fed to lower rates in 2016, and how?