Monetary Policy and Exchange Rates

The Federal Reserve should utilize a balanced approach to monetary policy. The current state of the economy—undershot employment and inflation goals—presents no conflict in achieving a neutral state. In fact any action that supports employment growth also moves inflation up toward our target (Evan

The last five years have shown that traditional monetary policies predicated on interest rate management by the Federal Reserve no longer deliver the economic growth they were once believed to. Keynesian economics has proved to not be as effective as once thought, which has led to the Federal Reserve choose alternative means to stimulate the economy and indirectly manage exchange rates (Hakkio, 1986). The uncertainty over interest rate polices has fortunately not led to increases in inflation, which has typically been the case in the past (Kopcke, 1988). The current economic conditions and the approaches the Federal Research are taking however are cause for concern, and from a personal standpoint many decisions are being evaluated more precisely.

Central banks using contractionary monetary policy have many tools to help reduce inflation. Most commonly it is selling securities and raising interest rates through open market operations. Avoiding a recession and lowering unemployment is undertaken by expansionary momentary policy, interest rates are lowered, securities from member banks are purchased and other ways are used to increase the liquidity. “The Fed uses three main instruments in regulating the money supply: open-market operations, the discount rate, and reserve requirements. The first is by far the most important. By buying or selling government securities (usually bonds), the Fed—or a central bank—affects the money supply and interest rates.”

Monetary policy focuses on keeping interest rates at a modest level, keeping prices steady, and keeping unemployment low. The Federal Open Market Committee is responsible for making the necessary monetary policy changes. These changes influence both the markets within the United States and the markets internationally. Currently, there is a lot of volatility within the markets, and there is a lot of speculation about if and when the Federal Reserve will raise interest rates. There is also speculation about whether a negative interest rate would work to get the economy back on target. Also, many worry about whether the current government debt level will continue, and with the number of people entering retirement increasing, whether there will be enough money coming in to cover the costs of the social programs, such as Social Security and Medicare.

On February 17, 2018 at approximately 1854 hours, I was dispatched to the Family Dollar located at 6670 Ridge RD Port Richey, FL in reference to a subject attempting to utter a counterfeit $20 bill. Upon my arrival, I made contact with Family Dollar employee, Katlyn Sue Edwards.

increase them to the neutral rate in order to ensure that lowering rates is a viable monetary policy

3. Inflation rates are steady along with currency rates; currency exchange risk will be lower.

Deteriorating global financial conditions in the immediate aftermath of the Fed’s December 2015 rate hike helped to produce a sizeable sell off in equity markets in January last year, although a sharp decline in China’s foreign exchange reserves was also to blame. The FOMC was widely expected to raise its policy rate again in March 2016, but the volatile events in financial markets consequently forced members, notably Chair Yellen, to embrace a more dovish policy posture which remained intact until last month. In contrast to last year, financial conditions have not tightened significantly since last month’s decision to raise the federal funds rate. This will, therefore, give a green light for the Fed to proceed with interest rate normalisation depending on economic conditions. Thus, financial markets currently have greater faith in the Fed’s economic outlook compared to a year ago. Meanwhile, the dollar exchange rate presents the FOMC with a more intriguing challenge, namely the risk of significant overshooting to the upside via a combination of an easier fiscal stance and tightening monetary policy. This outcome occurred between 1980 and 1985, and it helped to produce a significant hollowing out of the US manufacturing sector, notably in the Rust Belt, as well as producing large trade deficits. The

It is evident that we take action now to aid our economic activity. We can do this by adopting an expansionary monetary policy to stimulate our economy. The Federal Reserve has historically held rates at a relatively low level, but it is important that we gradually increase rates as our economy strengthens. Just last week our nation saw that, “the Federal Reserve sent a sharp, simple message to financial markets (on Wednesday): Pay attention. The Fed is thinking seriously about raising its benchmark interest rate at its next meeting, in June.” Our economy is not quite ready to tighten monetary policy. Expansion is relatively easy for the Fed to implement, and can be put in to action quickly. The Fed is already holding rates at very low level, but it is tough to predict what other global economies will do in the near future to stimulate their own respective economies. As a nation, I believe that in this moment in time, we need to continue the expansionary trend until we are stable enough to make great moves towards an ideal state for an economic

It is not vey clear if indeed the ECB favours the German economy when conducting monetary policy or not. In 2006, one year prior to the French elections, a popular topic during the political debate in France was the increase in interest rates by the ECB. Both French oppositions were criticizing the ECB for focusing too much on low inflation and disregarding the negative effects on growth. The French were trying to propose for more political influence in monetary policy. The German officials rejected this idea in defence of the proper functioning of the ECB. Of course at the time, the German economy was set to grow by 2,5% the upcoming year. We forward to the present (April, 2017) and find that in the past months it is Germany that has continuously been criticising the ECB for having a Euro that is “too low for Germany” as stated by Germany’s Finance Minister. The governor of central bank of France supported the ECB’s decision by saying that the actions were justified by the objective to maintain steady but low inflation rates for the whole

As interest rates bottomed out quickly after the onset of the recession, the Federal Reserve could no longer stimulate the economy with traditional and time-tested techniques. The controversial and unconventional method chosen by the Federal Reserve, and other central banks around the world, is known as “quantitative easing” (QE). QE functions by injecting large amounts of reserve capital into commercial banks with the hope that those banks will then be willing to lend the money at affordable interest rates. Ideally, the addition to economic activity affected by the influx of capital to banks should keep the value of the dollar relatively low, avoiding deflation and encouraging foreign investment by those wishing to take advantage of an affordable dollar. The cheaper dollar should also make American exports look more attractive to potential consumers in other countries. If interest rates stay low, and banks begin lending again, consumer and investor confidence should hopefully rise, leading to more spending and thus, economic growth.

By increasing or reducing the nominal interest rates, the money supply is either increased or reduced. When the rate goes up, people are not able to borrow, thus the money does not enter into circulation. But when the rates go down, people borrow in big numbers therefore increasing the money supply. So the monetary authority just needs to adjust the interest rates either upwards or downwards, and in-direct results will be reflected on the money on circulation.

This means that this is a high time for the ECB to take the action and adopt this policy rather than waiting for the other monetary policies to be failed and the economy is near its destruction. Since the ECB is working as a hub for the many nations which are connected and under the influence of the decisions which are taken by this central bank, here by, the ECB is required to be taking the decisions by considering all the nations, their issues and their priorities (Chong & Phillips,

In 2008-2009, the economy financial crisis has been affected in many countries with a rapidly decreasing in housing prices, follow by a protracted real estate boom. This has created an interest in the relationship between monetary policy and asset price, and it became a huge debate on how monetary policy should react to discern deviations of asset price developments. Even before the financial crisis in 2008-2009 happened there also has been a gigantic debate whether or not central bank should react and counter to the asset price developments. Proponents of a “leaning against” begin to argue that the central bank is able to prevent limit of asset price increases (Blanchard 2000, Bordo and Jeanne 2002, Borio and Lowe 2002,

Monetary policy involves manipulating the interest rate charged by the central bank for lending money to the banking system in an economy, which influences greatly a vast number of macroeconomic variables. In the UK, the government set the policy targets, but the Bank of England and the Monetary Policy Committee (MPC) are given authority and freedom to set interest rates, which is formally once every month. Contractionary monetary policy may be used to reduce price inflation by increasing the interest rate. Because banks have to pay more to borrow from the central bank they will increase the interest rates they charge their own customers for loans to recover the increased cost. Banks will also raise interest rates to encourage people to save more in bank deposit accounts so they can reduce their own borrowing from the central bank. As interest rates rise, consumers may save more and borrow less to spend on goods and services. Firms may also reduce the amount of money they borrow to invest in new equipment. A