The Federal Reserve: Macroeconomic Analysis

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.

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

The United Stated Federal Reserve Board (the Fed), a component of the Federal government, conducts monetary policy. The Fed essentially plays the role for the nation’s banks that these banks play for us. Just as we borrow money from the banks, the banks borrow money from the Fed. Just as we pay interest on the money we borrow, banks pay interest on the money that they borrow from the Fed. The Fed can use monetary policy to decrease unemployment by lowering the interest rate that it charges banks. If banks are able to pay a lower interest rate to borrow from the Fed, they are likely to lower the interest rate that they charge the

The Federal Reserve exercises its power to stimulate stable employment economies and economic prices. The pursuit of the required employment rate and the creation of price stability, the Federal Reserve can increase or decrease the interest rate.

The act stated that its purposes were "to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." After the implementation of the Federal Reserve, several laws were passed to supplement it. Some of the key laws affecting the Federal Reserve Act are the Banking act of 1935; the Employment Act of 1946; the 1970 amendments to the Bank Holding Company Act; the International Banking Act of 1978; the Full Employment and Balanced Growth Act of 1978; the Depository Institutions Deregulation and Monetary Control Act of 1980; the Financial Institutions Reform, Recovery, and Enforcement Act of 1989; and the Federal Deposit Insurance Corporation Improvement Act of 1991. In two of the above-named acts, Congress defined the main goals of national economic policy. These acts are the Employment Act of 1946 and the Full Employment and Balanced Growth Act of 1978. The main goals of the Federal Reserve are economic growth, a high level of employment, stable prices, and moderate long-term interest rates. The Federal Reserve System is considered to be an independent central bank. It is an independent central bank only in the sense that its decisions do not have to be passed by the

The CB uses open market operations to buy and sell securities as a means of implementing their monetary policies. They also used the open market operations as a way to control the liquidity of available money by influencing the short term interest and the supply of base money; therefore as a result controlling the supply of money. They also set the target rate for the feds and setting the discount rate at which for member banks to lend money to each other. The Feds also evaluate the bank mergers and also implements foreign exchange policy on behalf of US government and the

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

To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).

With that said the basic function of the FED relates primarily to the maintenance of monetary and credit conditions favorable to sound business activity in all fields; agricultural, industrial and commercial. Among this some duties include the following: lending to member banks, open market operations, establishing discount rates, fixing reserve requirements and issuing regulations concerning these and other functions. Each Federal Reserve Bank is best described as a Bankers Bank. In a nutshell, member banks use their reserve accounts with their reserve banks similar to the way we use our own checking account. They may deposit in the reserve accounts the checks on other banks and surplus currency received from their customers, and they may withdrawal on the reserve. Thus a bank with excess in the reserve requirements can enlarge its extension of credit (loans). However, let's not forget that the Fed has the

they buy and sell bonds from banks in an attempt to influence the FFR and thus other interest

increasing interest rates during recessions, instead of doing the opposite. The other reason why the Fed was inefficient is that they did not know about open markets and they had no ideal of the damaged they had caused after the new dealers gave it control of reserve requirements. During the World War 2 Fed gave up its independence to the Treasury. The 1970s saw targeted

In quantitative easing the government buys its own bonds such as gilts, or bond issued by companies and other assets. This means that the commercial banks will be getting more money in their accounts with the central bank, which in return gives them confidence to increase lending to customers and to each other. The extra lending boosts cash and credit flowing in an economy.

Given the severity of the crisis of 2007, and the ineffectiveness of the measures the Fed had at its disposal, it was forced to engage in nontraditional monetary bank policies through a program called quantitative easing. Instead of focusing solely on cutting interest rates and by this reducing the price of money, the Fed decided to increase the quantity of money; going to the financial markets to buy assets, and creating money while doing so. The main focus was acquiring Treasury bonds, government debt, and assets backed by home loans. The reason to buy the first two is pretty clear, but assets backed by home loans might not be. Those assets where considered to be “rotten”: they lost most of their value after the crisis, and no one risked

The FOMC is responsible for the open market, while the Federal Reserve System supervises the discount rate and the reserve requirements. These three are the tools of the monetary policy. The open market operations are the most important tool used to regulate the money supply and the credit available. The main objectives of the FOMC are: analyse the economic and financial conditions, carry out the appropriate monetary policy which fits with the price stability and sustainable economic growth, guarantee full employment and a sustainable pattern of payments and international