The FED's Expansionary and Contractionary Monetary Policies During and After the Economic Recession

When there are problems in the United States economy, whom do the people turn to? The most obvious answer is the government. The federal government is given the responsibility of maintaining a stable economy. When the economy is not stable, like during a recession, the American people turn the government and demand that they fix whatever problem is occurring. The government can handle the economy in a recessionary period in one of two ways: expansionary fiscal policy or expansionary monetary policy. The sector of the government that handles the economy using these policies in a recession is the Federal Reserve. The best course of action to get the United States out of a recession is to use expansionary monetary policy.

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.

The Federal Reserve monetary policy exists to accomplish the goals of their dual mandate, maximizing employment and keeping prices stable. To accomplish these goals, monetary policy either changes the interest rate, namely the federal funds rate, or the money supply. Before carrying out these policies, the Fed considers economic data such as the trends in the CPI which describes the average level of inflation and various trends in the labor market . Through monetary policy, the Fed is also responsible for fighting recession. To do so, the Fed decreases interest rates but only to a certain point because nominal interest rates cannot go below zero. Therefore, it is important that the Fed return the federal funds rate back to its neutral rate before the next recession begins .

The Federal Reserve is adjusting to what some call the “new normal.” After the most recent recession the United States has experiences a slow recovery which has a notable disconnect between inflation and unemployment. Further, banks hold high excess reserves and the Fed has a balance sheet which includes over $1.7 trillion in mortgage backed securities (Quarterly, 2017, p.4). As such the Fed has had to rethink its past procedures in order to maintain its dual mandate of maintaining unemployment and price levels. While it has been a decade since this recession began the economy is just now showing signs of strength and such the Fed is beginning a process of “normalization.” To do this the Fed’s has changed its stance on monetary policy in

The Federal Reserve 's actions affect the economy because changes in the real interest rate affect planned spending. For example, an increase in the real interest rate raises the cost of borrowing, reducing consumption and planned investment. Thus, by increasing the real interest rate, the Fed can reduce planned spending and short-run equilibrium output. Conversely, by reducing the real interest rate, the Fed can stimulate planned aggregate expenditure and thereby raise short-term equilibrium output. The Fed 's ultimate objectives are to eliminate output gaps and maintain low inflation. To eliminate a recessionary output gap, the Fed will lower the real interest rate. To eliminate an expansionary output gap, the Fed will raise the real interest rate.

The United States has had several economical downfalls within the last century, many which have been aggravated by the change of the money supply. As if there’s much to learn from America’s economy, having the highest Gross Domestic Product (GDP) per Capita is an aid towards any future economic collapse. With as much purchasing and supplying power that the United States has, it would be wiser to remain within the policies closest relating to stimulating a demand economy. By doing so the government is ensuring that there is enough need before purchasing supplies for said goods or services. With the United States free market, there is little that the Federal Government could do to have a say in monetary policy besides setting a fixed interest

The Fed is expanding the money supply. The Fed have data that shows a positive increase in the labor market, house hold spending, housing sector. The Fed is trying to increase price stability, strengthen the labor market, and expand economic activity within the nation. Their policy in place is to reduce inflation.

To reduce money supply for fighting inflation the Central Bank can also raise cash reserve ratio of the banks. The higher cash reserve ratio implies that the banks have to keep more cash reserve with the Central Bank. As a result, the cash reserves with the banks fall which force them to contract credit. With this money supply in the economy

Throughout last year, the media were solely focussed on the differences of opinion on the Federal Open Market Committee (FOMC) between the doves and hawks as being solely about the projected increase in the federal funds rate. The baseline outlook proposed by Chair Yellen was for a glacial trajectory, but this was always subject to alteration depending on the underlying tone of incoming economic data. Since the financial crisis, however, US monetary policy has been underpinned by two separate pillars: 1) asset purchases, and 2) a zero-bound federal funds rate. Divisions of opinion between hawks and doves were evident before the onset of tapering asset purchases in 2014, and they

How can monetary policy and fiscal policy greatly influence the US economy? Keynesian economics says, “A depressed economy is the result of inadequate spending .” According to Keynesian the government intervention can help a depressed economy through monetary policy and fiscal .The idea established by Keynes was that managing the economy is a government responsibility .

Expansionary Activities: The Fed uses three monetary policy tools, which include open market purchases for securities, discount rate decreases and reserve requirement decreases in order to boost the money supply. All else constant, there is an increase in the bank’s reserve accounts when the Federal Reserve buys securities in the market. Interest rates in the economy decrease when Fed reduces the discount rate. Conclusively, Reserves in all banks spread all else constant, when reserve requirements decrease. Bank deposits and assets increase when reserves increase in the case of open market operations and reserve requirement changes. As a result, security prices rise and interest rates fall. Decreasing interest rates’ direct impact is evident in the case of discount rate changes. Borrowing is supported when interest rates decline. The spending of economic agents increase when cheaper funds are available. Inflation advances when the economy expands, when additional real production is encouraged and when market participants boost their

The Fed Reserve Bank (the Fed) uses monetary policy response work with open market operations to effect interest rates, however, during the financial crisis, the Fed used the unconventional monetary policy of quantitative easing to lower interest rates nearly to zero, by increasing the money supply. The Fed response was a way to stimulate the economy, it was not an attempt to stabilize it. This drawing down of interest rates was with the goal to stimulate the economy. This worked through by increasing the money supply allows

On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, the committee agreed to continue its monthly $85 billion purchase of Treasury and mortgage-backed securities as long as the unemployment rate remains above 6.5 percent. Inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal and longer-term inflation expectations continue to be well anchored .

However, the Fed has maintained that they don’t want to stifle the economic recovery by raising rates early. They “continue to closely monitor inflation indicators and global economic and financial developments.”

Monetary policy is a powerful governmental weapon which has historically proven that it is difficult to wield. This difficulty is one of the reasons why some economists doubt the effectiveness of monetary policy as a whole. These economists find that monetary policy is difficult to implement because of estimation problems and time lag problems, as well as cyclic effects. They also point out situations in which monetary policy may not work at all. On the other hand, some economists swear by monetary policy as one of the most influential economic tools. These economists show that controlling money supply in America is a relatively young idea, and is developing rapidly. They