Analysis of Monetary Policy and Policy Actions Taken by the Federal Reserve:
Monetary Policy refers to what the Federal Reserve does to influence the amount of money available to consumers and the interest rate at which people can borrow money.
By modifying interest rates, buying or selling government bonds, or changing bank reserves the Federal Reserve is able to influence the market through the Monetary Policy by either expanding or contracting the money supply.
Reasons that the Federal Reserve would want to influence the market include lowering unemployment, increasing consumer spending, or controlling inflation.
Key Factors That Influence the Quantity of Money That People Desire to Hold:
There are three key factors that influence the amount
I will describe how expansionary activities by the FED impacts credit availability, money supply, interest rates, and security prices. The FED uses expansionary activities to control credit availability to banks either up or down depending on what it sees as needed. This is done through the ratio rate. The lower the rate the more money a bank has to loan. The lower the rate the less money the bank has to keep on hand which means the bank has more money to loan(Tarver, E.,2015, May 28).
- What are the two primary mandates of the Federal Reserve? “…so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. ”[1] The two primary mandates, sometimes referred to as the Dual Mandate, would be maximum employment and stable prices. The goal of long-term interest rates is somewhat dealt with when an attempt is made towards stable prices.
The Federal Reserve bank is the central bank of all American banks. Its main job is to make sure the America economy is safe and sound. It is known as nicknames such as the “Fed” and ‘The Banks’ Bank.” For many years this “banks’ bank,” is met with animosity. In an article on the BBC by Zoe Thomas, titled “Why do many Americans mistrust the Federal Reserve?”
All the Acts have an impact on the economy; however, in my opinion, the Federal Reserve Act plays an important role than the other Acts. It is the oldest Act compared to the others without any other Act and effective. They set the federal discount rate; which enables control to the availability and stability of money and banks in good standing can borrow money at discounted rate. So the Federal Reserve is responsible for the money supply. During the recession, they can lower the interest rate to stimulate the economy, making it favorable for banks as well as individuals to borrow money.
Congress created the Federal Reserve System, which is the central bank, on December 23rd, 1913. Dual mandate, which is the Fed’s main goals, focuses on maintaining low inflation and having a low rate of unemployment; allowing the Fed to have a clear objective in what they are trying to accomplish. The main roles of the Fed in the U.S. economy are open market operations, open market purchases, open market sales, the discount rate, and required reserves. Thus, it revolves around monetary policy and creates different ways to alter and affect how the economy is running.
History Of The Federal Reserve Why was it Formed? The Federal Reserve was formed due to financial crises which caused massive problems, not just for the bank that was falling but for all banks. The panic of one bank falling triggered a domino effect on other banks. As one bank failed people not even using that bank saw the panic and would withdraw their deposits even when their bank was not in any danger of failing.
Through its tools of open market operation, the Federal Reserve manages monetary policies in the economy. To encourage investment/borrowing, the Federal Reserve lowers interest rates. To fight the impact the financial crisis in 2010, the
The Federal Reserve maintains the ability to implement tools in order to balance the economy. These include controls based on banks or operations that the Reserve itself takes part in. All have the same goal, maintaining a balance in our economy and preventing catastrophes like the Great Depression from occurring again. The three tools that the Fed is able to implement are reserve requirements, interest rate controls, and open-market operations.
For instance, the Federal Reserve may increase or decrease the interest rates at specific times according to the state of the economic environment. If the Fed adopts an expansionary policy, money supply increases, thereby lowering
When the interest rates were at or near zero percent and could not be lowered any more, the Fed had begun experiments with unconventional monetary policy tools to kickstart economic growth and boost demand. A few examples of unconventional monetary policies include forward guidance, quantitative easing, credit easing etc. Since the great recession, the Federal open market committee (FOMC) has used forward guidance as one of its main tools to help interest rates remain low and improve credit availability. Forward guidance consists of promises/ verbal assurances made by the central bank to the public about its future actions and intended monetary policies.
In the short run, monetary policy influences inflation and the economy-wide demand for goods and services--and, therefore, the demand for the employees who produce those goods
The main goal of monetary policies is to reduce interest rates. This type of policy was actually “the main policy used during the Great Recession . . . because the fiscal policy takes too long to implement” (James, 2015). During the Great Recession, “the Fed aggressively lowered interest rates during 2008, adopting a zero-interest-rate policy by year’s end” (Blinder & Zandi, 2010). This led to the use of what is known as quantitative easing.
The federal funds rate, the main interest rate managed by the Fed, is the rate which deposit banks charge each other to trade funds overnight to maintain reserve balance requirements. When the Fed buys securities, the money is sent into the banking system. As the money streams into the banks, more money is available to lend because there is more money available. Interest rates will go down and borrowing and demand should increase to stimulate the economy. If the Fed buys bonds in the open market, it increases the money supply in the economy by exchanging out bonds in exchange for cash to the public.
These areas are conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices; supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers; maintaining the stability of the financial system and containing systemic risk that may arise in financial markets; and providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems. The Federal Reserve was created because of events such as the panic of 1907. The panic of 1907 was very similar to the
This is primarily a tool at the disposal of the central bank of a country which uses different tools to manage the macro economic variables of a country to keep the economy stable or to stabilize it in situations of fluctuations. Monetary policy can be expansionary or contractionary depending on whether the money supply is being increased or decreased in the system so as to affect economic growth, inflation, exchange rates with other currencies and