Macroeconomics: How The Federal Reserve Controls The Money Supply

Our economy is a machine that is ran by humans. A machine can only be as good as the person who makes it. This makes our economy susceptible to human error. A couple years ago the United States faced one of the greatest financial crisis since the Great Depression, which was the Great Recession. The Great Recession was a severe economic downturn that occurred in 2008 following the burst of the housing market. The government tried passing bills to see if anything would help it from becoming another Great Depression. Trying to aid the government was the Federal Reserve. The Federal Reserve went through a couple strategies in order to help the economy recover. The Federal Reserve provided three major strategies to start moving the economy in a better direction. The first strategy was primarily focused on the central bank’s role of the lender of last resort. The second strategy was meant to provide provision of liquidity directly to borrowers and investors in key credit markets. The last strategy was for the Federal Reserve to expand its open market operations to support the credit markets still working, as well as trying to push long term interest rates down. Since time has passed on since the Great Recession it has been a long road. In this essay we will take a time to reflect on these strategies to see how they helped.

For this assignment I picked “the role of the Federal Reserve” a mere recital of the economic policies of government all over the world is calculated to cause any serious student of economics to throw up his hands in despair (pg, 74). The Federal Reserve is now in the business of enforcing the United States government’s drug laws, even if that means making a mockery of both state governments’ right to set their drug policies and the Fed’s governing statutes. A Federal Reserve official who played a key role in the government 's response to the 2008 financial crisis says the government should do more to prevent a repeat of that crisis and should consider whether the nation 's biggest banks need to be broken up. Neel Kashkari says he believes the most major banks still continue to pose a "significant, ongoing" economic risk. The next ten years will see an explosion of government debt and an implosion of government’s ability to fulfill its promises. Any economic or investment model based on past performance under previous economic conditions will be worthless just as useless as the Federal Reserve’s models.

Growing up as a child, people have been told the economic is dead; none of us should be wasting time to understand it. Most us have been lived poor, which is related to the economic. Most of us know the meaning of the economic. Economic describe us by our social status and human behavior. Most girls would not date guys if he is not making enough to pay his bills or her bills. Money is the root of all evil; we even call it marketing, currency, trade, traffic, and industry. Money was here before my parents were born, Money raised my brother and I. the fact that money is so powerful, we spend our life battling for it, and worrying about it. I have family member that would kill for money because they loved money so much. Where did

When economists think of monetary policy implementation they primarily focus on instruments, operating targets, intermediate targets, and policy goals. Instruments are the variables directly controlled by the central bank(Flandreau, 2007). These contain, an interest rate charged on reserves borrowed from the central bank, the reserve requirement ratios that govern the level of reserves banks must hold against their deposit liabilities, and the composition of the central bank’s own balance sheet. The instruments of policy are employed to accomplish a

In an instant a single organization, with minimal government oversight, can influence entire markets and monetary supply of the country with the largest economy in the world. The United States founding fathers established a government system to distribute certain powers of the federal government to particular branches that have checks and balances in place to assure efficiency and openness among its divisions. One may assume that the organization that controls the monetary supply of an economic powerhouse of a country would have strong oversight and control over the policies they carry out. The Federal Reserve, also referred to as The Fed, has a purpose to protect and control the fiscal system of the United States to create a safer lending and borrowing market for private citizens, businesses, and the federal government. Americans perceive the Fed as an extremely powerful organization. Some have asserted, including Hillary Clinton’s spokesman, Jesse Ferguson, that “The Federal Reserve is a vital institution for our economy and the well-being of our middle class” (qtd. in Shapiro 7). Unfortunately, Federal Reserve financial policies have become detrimental to the growth of the national economy and the dollar, therefore, congressional actions against the Federal Reserve Bank are a necessity to avoid continuation of instability in both US and world markets.

The Federal Reserve Act was signed into law on December 23, 1913. Due to a series of financial panics around 1907, the Federal Reserve (also referred to as the “Fed”) was created by Congress to promote a stable banking system and an active economy. The Federal Reserves’ greatest client and biggest spender is the government of the United States. All proceeds from taxes generated and disbursements are managed through the account that the United States government has set up with the Federal Reserve. The Fed operates independently of the government; however, the Feds’ jurisdiction originates from Congress and the Fed is subject to congressional supervision. Furthermore The President nominates the members of the Board of Governors which must be confirmed by the Senate. The salaries of the Fed are also set and appointed by the government. Although the Fed can exercise freedom in monetary determinations, the existing relationship with the government invites corruption particularly with the present administration and its champagne socialists.

The Federal Reserve, Bureau of Labor Statistics, Department of Labor, Department of Commerce and Treasury Department play crucial roles in the value and availability of money in the USA economy. First, the Federal Reserve is the central bank of the United States. It is run by a Board of Governors appointed by the president and serves as a bank to banks. It performs five general functions to promote the effective operation of the U.S. economy. One, it conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy. Second, it promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the

The first to be discussed is the discount rate is the interest rate charged by the Federal Reserve to banks for short term loan basis. The increase and decrease of the money supply is determined by the discount rate. Discount rate would be used is a bank needed twenty million dollars, the money would be borrowed from the United States treasury but has to be paid back at a interest rate of three percent. This monetary tool would be used with inflation if the expected inflation increases so will the discount rate and vice versus at the same rate remaining equivalent. During periods of time with high unemployment rate the discount rate is lowered in order to counteract high unemployment and to prevent the possibility of a recession. Secondly, there is the ratio reserve. Ratio reserve is the amount of money that has to be kept at a bank on reserve; this amount can be adjusted to back outstanding deposits. Ration reserve creates the marginal money supply at any given moment due to the Fed raising or lowering the reserve requirements. Although it is rarely used to control the money supply it is a tool that can be used. An example of how it would be used would be if Will comes in and deposit one thousand dollars and the reserve amount is ten percent, of that one thousand dollars one hundred will go to the reserve ratio. Allowing the other ninety percent to be used as a money supply for loans and etc. In the case of unemployment and high inflation the Fed has to lower the reserve ratio in order to decrease the unemployment rate and inflation because if the reserve ratio is lower then the economy and the money supply is moving more vividly. Lastly is the open market operations. Open market operations is the act of buying and selling Treasury securities’ between the Fed and certain selected banks in the open market, it is directed by the FOMC. Open market operations would be considered

The early to mid-eighties presented a challenge to the fed. A combination of falling oil prices and the Federal Reserve 's control of the money supply, helped to slow down an inflation that had been largely out of control in the previous decade. By the mid-eighties, the economy had bounced back and the United States was entering into one of the longest periods of consistent and sustainable economic growth since the second world war. Along with this growth, the annual inflation rate did not exceed 5%.

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

Money, it certainly does make the world go round, and the reason it is able to do so, is because people have trust in this little piece of paper. Around the globe there is no piece of paper that inspires more confidence. Officially, the US Dollar bills are Federal Reserve notes. Every note that is spent or received is part of a complex organization known as the Federal Reserve System. The Federal Reserve System is the integral component that keeps the American banking system afloat. It is, in essence, the governing body of banking and is responsible for many policies, laws, and regulations that have shaped the American banking system into what it is today. This institution has garnered a lot of support, as well as faced a lot of backlash in times of financial turmoil. However, observing the facts and analyzing the history of the Federal Reserve System will show that is has largely been a positive force in America. The Federal Reserve System plays a large role in both the national and world economies and is therefore heavily scrutinized. Under such scrutiny, one can find that a positive and significant relationship exists between the Federal Reserve System and the economy because of the policies the Federal Reserve enacts, the Federal Reserve’s regulation of interest rates, and the Federal Reserve’s response to crises in direct connection to economic stability.

The Federal Reserve’s (Fed) Quantitative Easing (QE) refers to easing the market situation by quantity. QE is a monetary policy used to stimulate the United States’ economy by injecting money into the market. The policy was done by the central bank that prints money to buy the government bonds from financial institutions. Other than that, the Fed also set the interest rate to be between zero to a quarter percent to encourage the public to borrow money from local banks. The economists hoped to boost the economy by increasing the investment.

The Fed makes these debt transactions with banks in order to alter total reserves in the banking system. The Fed uses three tools of monetary policy, trying to influence the amount of reserves in private banks. They are Open Market Operations, Discount Rate and Reserve requirements. Open market operations are purchases and sales of U.S. Treasury and federal agency securities. This is the Federal Reserve’s principal tool for implementing monetary policy. The Federal Reserve’s objective for open market operations has varied over the years. In the 1980’s the focus shifted toward attaining a specified level of the federal funds rate. This process was largely complete by the end of the decade. Discount rate is the interest rate charged to commercial banks and other depository institutions or loans they receive from their regional Federal Reserve Bank’s lending facility. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

We are about to enter a potentially critical week for US monetary policy with the onset of the 16-17 September Federal Open Market Committee (FOMC) meeting. It is important because markets could potentially learn much more about the Fed’s policy reaction function. Since her tenure began, Fed Chair Yellen repeatedly stressed the importance of data dependency in terms of formulating policy. The problem is, however, that the FOMC never explicitly stated which indicators had a higher weighting in the decision-making process. Thus, data dependency has failed to yield the policy clarity so yearned for by financial markets. The case for a 25 basis points rise in the federal funds target is based on the premise