The Federal Reserve System Essay example

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

It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.

Three ultimate macroeconomic goals which every government strives to achieve in order to ensure sound macroeconomic policy are maintenance of relative stability in domestic prices, attainment of a high rate of employment or full employment and achievement of a high rapid and sustainable economic growth. The relationship between inflation and unemployment on growth remains a controversial one in both theory and empirical findings. Originating from the Latin American context in the 1950s, the issue has generated an enduring debate between structuralists and monetarists. The structuralists believe that inflation is essential for economic growth, whereas the monetarists see inflation as detrimental to economic progress. There are two aspects to this debate:

Created in 1913, the Federal Reserve System was established to serve as the central bank of the United States and to provide the nation with a save, flexible, and stable monetary and financial system. Over the years, the Fed's role in banking and the economy has expanded, but its focus has remained the same (Federal Reserve Bank ). However, other countries also have their own central banks, such as the Bank of England, the Bank of Canada, and the Bank of Mexico. Because of this, economic policies were set almost exclusively with that country’s interests in mind—devaluation of currency to cheapen a country’s exports was common practice. Nevertheless, every country had protectionist views on banking policy based solely on national self-interest contributed to and deepened the results of the Great Depression.

The Federal Reserve System was established in 1913 by the Federal Reserve Act to improve the U.S banking after the crises of the Wall Street Panic of 1907 that caused financial ruin for much of the country. Therefore, the main purpose of the Federal Reserve system was to administer banking activities to assure that everything is stable and as the economy changes it would not ruin the banking industry. However, as time passed the Fed has obtained new responsibilities, which have been broken down in 3 sections and those are:

The police procedural TV series, Crime Scene Investigation (CSI), had episodes where a case unravels to reveal more than one case; intersecting each other. The suspect in one murder can be a victim in another. The chains of the relationship become a sophisticated network I find engrossing. The inverse interaction between inflation and unemployment as delineated in the Keynesian Phillips curve has proven a rise in one variable can lead to a fall in another in the short run. However, the Monetarist’s expectations augmented-Phillips curve suggested the two variables are always spiraling upwards in the long run. The elements operate dependently because a change in inflation will eventually affect employment and vice versa. In order to reduce both unemployment and inflation but still have positive economic growth that is when Aggregate Supply comes in and intervenes.

Short for The Federal Reserve System, the Fed is the central bank of the United States of America. Even though there are numerous banks in this country, the Fed is highest ranking system that controls and monitors the money of this nation. The president nominates the leaders of this system, who are called the Board of Governors. They are called this because the group consists of seven governors. After the president nominates them, the Senate has to approve of his choice. It was founded in 1913 by Congress for various reasons. One of the motives behind establish such a system is to create a general pool of finance for the smaller banks, such as Bank of America and Wells Fargo. When these banks are in need of money, they

In 1958, economist A.W. Philips stated that unemployment and inflation had a correlation from the past in that low inflation was associated with high unemployment and vice-versa. Friedman contradicted this view in a presidential address to the American Economic Association by saying that even though the correlation was visible in the data, it did not represent a true trade-off especially in the long run. He argued that there is always a temporary trade-off between inflation and unemployment but never a permanent trade-off. Only temporary success would be achieved through a policy to generate higher inflation to curb unemployment as it would finally pick again, even as inflation stayed high.

According to what we are given, the rate of inflation is at an acceptable level of 2 % while unemployment rate is exceptionally high. The only way to counter this is by reducing the tax rates and increasing the government expenditure on both services and goods which is an expansionary policy. The reason for this policy is to first raise the budget deficit. For consumption and spending not to drop the fed can choose to increase the money supply to keep it high.

This consequently puts monetary policy firmly on a discretionary footing. By contrast, monetarists have always denied that a long-term trade-off between unemployment and inflation exists due to the neutrality of money. The existence of any inverse relationship between the former and latter is captured by the natural rate of unemployment. The Fed’s estimate for this key metric had been revised down earlier in the summer to 5.1%. The release of the economic projections used at last week’s FOMC meeting indicates that this measure has, once again, been lowered to 4.9%. A few weeks ago, I argued that the case for the Fed raising its policy rate this month depended critically on the conviction of its estimate of the natural rate. Thus, it appears that continued weak wage inflation has convinced the FOMC that 5.1% was too high an estimate. The current stance of policy has, therefore, scope to remain intact. The big issue for financial markets is just how much more leeway the Fed will provide in keeping conditions accommodative. The recent behaviour of inflationary expectations has clearly been noted by the FOMC. Fed Chair Yellen admitted that the decline had made achieving the 2% medium-term inflation target more difficult. The drop in expected inflation may have also driven the FOMC to lower their estimate of the natural rate of unemployment. This will, however, be breached by 2016 Q4. The

In the beginning of reading this article, I was not sure exactly what the monetary policy even was, so I started off by looking for the definition on Google. Google explains the monetary policy as being “the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency” (Google Definition). After reading this definition, I understand what the monetary policy was a little more and could fully tackle the article. Going back to the article and its explanation of how the monetary policy influences inflation and employment. The beginning of the article states “monetary police influences inflation and the economy-wide demand for goods and services—and, therefore, the demand for the employees who produce those goods and

The Taylor rule can be the optimal monetary policy, as the interest rate policy should follow a version of the Taylor rule. Since the equation calls for a positive value of h, a rise in the inflation rate should cause a rise in the real policy interest rate, and vice versa. If only the coefficients on the output and inflation gaps are chosen suitably to echo the way that these variables affect the future inflation rate.

In this paper, we will present a model discussed at length in Todorova (2012) representing the Phillips curve, the textbook macroeconomic relationship posting a negative relationship between unemployment and inflation. Specifically, the model posits that when unemployed workers are scarce, employers must compete with one another for the remaining, qualified workers by bidding wages upward, which translates into higher costs, which combined with stronger consumption by a more employed population, generates higher prices. To the contrary, when unemployment is high, perhaps a result of an adverse shock to the economy, demand for labor falls, as does consumption and investment spending, which reduces overall economic activity and tends to reduce prices. The Phillips curve recently has come under scrutiny in the literature and among Federal Reserve policymakers. Many current members of the Federal Open Market Committee (FOMC) cite the Phillips curve as their justification for continuing to raise interest rates, but there are valid questions as to whether this relationship fits the data. Using Todorova’s model, we find via computations and numerical simulations that the behavior of the inflation rate is in all cases oscillatory in nature – calling into question both the wisdom of the textbook Phillips curve proposed by Olivier Blanchard and the

The relationship between unemployment and inflation has been the subject of heated debate, stimulate academic divide between macroeconomics because the relationship is difficult to explain. Rational expectations have been proposed by the new classical school of thought, there is not even a short-term trade-off between inflation and unemployment expected. Only a compromise when inflation is unanticipated. We think there is a compromise between the two, even in the short term, regardless of the fact that inflation is expected or not, and take the new Keynesian position on the issue.

Some variables in Economics are very close related to each other. In many cases, the combination of these variables can cause an unexpected effect on the economy. One of these examples can be observed using the Phillips Curve. This curve can be used as a tool to represent the inverse relationship between inflation and unemployment in the short-run. In order to comprehend this inverse relationship, we must first know what inflation is, how we define unemployment, and how these two variables are connected using the Phillip Curve. If we understand the meaning of each one of these variables in the economy, it will be easier to comprehend the logic of a short-run tradeoff between unemployment and inflation.