Monetary Policy in the United States
1. Identify at least three problems facing the FED in achieving its goals of monetary policy and give your recommendations on how to deal with each of the problems you list.
Inflation presents a problem for the FED achieving it’s goal of price stability. Inflation is unavoidable as far as the natural progression of an economy is concerned. Supply and demand also affect inflation. While the FED cannot control supply and demand of a product, I would suggest that they try to control price stability by creating regulations of what a company can charge related to the supply and value of a product. A high unemployment rate negatively affects the FED’s goal of a high employment rate. The employment rate is
…show more content…
3. Explain how changes in reserve requirements and the discount rate affect the operations of banks and other depository institutions.
Changes in reserve requirements and the discount rate affect the operations of banks and other depository institutions by changing the amount of actual funding that they have available to them. If they are required to hold more actual money, they may have less financial instruments such as gold to back up the value of the money. If the discount rate fluctuates, banks may have to adjust interest rates on their loans to compensate for the money they are gaining or losing.
4. Explain why the FED cannot set intermediate targets in terms of both monetary aggregates and interest rates.
The FED can only pursue one target at any given time. For example, if they are targeting interest rates, exchange rates will fluctuate and vice versa. The FED’s influence over real interest rates is weaker than that of nominal interest rates and stabilizing the economy is more important than stabilizing interest rates.
5. Update the case information by using at least two (2) data sources in addition to the text.
Modern monetary policy does not involve gold as much as it used to in the past. In 1968, the United States reneged on it’s guarantee to pay in gold and effectively removed itself
The Federal Reserve increases its reserves by issuing loans to a commercial banking system. This allows the bank that is borrowing reserves to disburse credits to the public. The Federal Reserve Banks offer primary credit, secondary credit, and seasonal credit, to bank organizations each with its own interest rate. Depending on if the Fed wants to decrease or increase the interest rate can be a positive or negative effect to the public. If the rate is decreases it encourages banking organizations to get more loans. When this is done the banks acquire more funds and are able to disburse more loans the people.
15. What is the primary role of the Federal Reserve? What is the significance of this role?
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.
The Federal Reserve has many influence on economy and can be very helpful to banks when they are in trouble or need help to balance out. Fed also helps the government programs as well but is not direct link to the government. Many people need to know how the Federal Reserve work and how it effects on are life. It really didn’t know much about the Federal Reserve before doing this paper and now I know how important it is to understand how inflation can be controlled by the Federal Reserve. In this paper I want to help people understand how the Federal Reserve is structured, power they control, and it effect on the economy, how does the Federal Reserve effect today’s economy and how much power do they have over it. I really think know that I have explained how the Federal Reserve effect the consumer and how it was structured. It structured with the two parts that is broken down with different branch and banks. One of the part is different banks that are spread through the united states and the other branch control all the other through the board members that got put there by the President and the Senate so they have a major role in the economy” On balance, the Federal Reserve has moved closer to the “flexible inflation targeting” used, in some form or another, by many foreign central banks.”( Robert J Tetlow) The
Inflation is a general increase in the prices of all goods and services. Inflation occurs when the average level of prices in the economy increases over time. Even as overall prices are increasing, particular relative prices will change. The US Federal Reserve attempts to control and reduce inflation. Central banks focus is on strictly controlling inflation, protecting financial assets, and keeping labor markets strictly in check. Central Banks hold inflation more important than unemployment. Central Banks believe the only long-run impact of monetary policy is on the rate of inflation. They believe free-market forces in the real economy determine real output, employment, and productivity. To attain the targeted inflation rate, central banks influence credit creation and hence spending by frequently adjusting interest rates.
This report discusses the association between the Federal Reserve System and U.S. Monetary Policy. It mentions that the government can finance war through money printing, debt, and raising taxes. It affirms that The Federal Reserve is not a government entity but an independent one. It supports that the Federal Reserve’s policies are the root cause of boom and bust cycles. It confirms that the FED’s money printing causes inflation and loss of wealth for United States citizens. It affirms that the government’s involvement in education through student loans has raised the cost of a college education. It confirms that the United States economy is in a housing bubble, the stock market bubble, bond market bubble, student loan bubble, dollar bubble, and consumer loan bubble. It supports the idea that the Federal Reserve does not raise interest rates because of the fear of deflating the bubbles they have created in recent years.
After the Revolutionary War, many of the country’s citizens were in great debit and there was widespread economic disruption. The country was in need of an economic overhaul and the new country’s leaders would need to decide how to do this to ensure the new country did not fall apart. After two unsuccessful attempts at a national banking system, the Federal Reserve System was created by the Federal Reserve Act of 1913. Since its inception, the Federal Reserve System has evolved into a central banking system that grows with the country. The Federal Reserve System provides this country with a central bank that is able to pursue consistent monetary policies. My goal in this paper is to help the reader to understand why the Federal
United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial
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
The gold standard regulated the quantity and growth rate of the nation’s money supply. The Federal Reserve was charged with the duty of regulating the inflow and outflow of gold by increasing or decreasing the discount rate. The discount rate is the interest rate the Fed charges depository banks that borrow reserves from it. An outflow of gold meant an increase in the money supply and this was triggered by a decrease in the discount rate. On the other hand an inflow implied an increase in the discount rate and hence a restriction of the money supply. The activities of the Federal Reserve with regard to the gold standard were to be in accordance with all other countries on the standard such as the United Kingdom in other for the system to work effectively.
The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.
Monetary policy is under the control of the Federal Reserve System and is completely discretionary. It is the changes in interest rates and money supply to expand or contract aggregate demand. In a recession, the Fed will lower interest rates and increase the money supply. The Federal Reserve System’s control over the money supply is the key Mechanism of monetary policy. They use 3 monetary policy tools- Reserve Requirements, Discount Rates/Interest Rates, and Open Market Operations. The reserve requirement is the percentage of bank deposits a bank must hold in reserves and cannot loan out. By raising or lowering the reserve requirements, the Fed controls the amount of loanable funds. The interest rate is the amount the FED charges private banks, so they can meet the reserve requirements. The prime rate is currently set at 5%. If the Interest rate is low, the banks will borrow more money from the FED and the money supply will increase. Interest rates have been above average for the past 20 years, but are currently considered low. Open Market Operations is the most effective and most used
Under normal circumstances, the Federal Reserve would manipulate the economic situation by manipulating the reserves and by changing the target interest rate (Keister and McAndrews (2009). However, the Federal Reserve has bypassed
Monetary policy affects the aggregate demand by altering the supply or cost of money. One of which is the alteration of the rate of interest. By reducing the interest rate, it encourages consumers and businesses to borrow and spend or invest instead of saving their money. As a result, the supply of money increases. When there is more money, it
Monetary policy effects the GDP inflation. “Between 1996 and 2000, real GDP in the United States expanded briskly and the price level rose only slowly. The economy experienced neither significant unemployment nor inflation. Some observes felt that the United States had entered a “new ear” in which business cycle was dead. But that wishful thinking came to an end in March 2001, when the economy entered its ninth recession since 1950. Since 1970, real GDP has declined in the United States in five periods: 1973-1975, 1980, 1981-1982, 1990-1991 and