The Federal Reserve and Its Role in the Global Economy

5550 WordsDec 13, 200823 Pages
Introduction The American economy is a complex balance of services, financial, manufacturing, agricultural, and banking industries. For this reason, the U.S. is a global economy, relying upon foreign investments and trade to create and retain wealth. Over the years, America has evolved from farming-based, to industrial, to a services-based economy. As a result, the banking system from its inception has weathered the many growing pains associated with a new government and currency, instituting regulations and a centralized bank to examine the economy, and implement policies intended to offset factors negatively affecting the general financial health of the country. Now, as the United States moves towards a globally interdependent…show more content…
Within these parameters, the Federal Reserve examines current market and credit conditions, and then utilizes monetary policy, regulation, and/or interest rate changes to execute changes in the overall economy. The Federal Reserve website explains the theory of monetary policy in more detail. As the website says, “the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks, and in this way, alters the federal funds rate…the rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight” (www.federalreserve.gov/monetary policy/fomc). While this sounds simplistic, the federal funds rate actually affects a variety of economic factors. According to the website, the federal funds rate impacts both short- and long-term interest rates, money supply and credit, which eventually leads to changes in employment, inflation, and output (www.federalreserve.gov/monetary policy/fomc). Traditionally, the economy responds to adjustments to these factors; however, in the case of more severe economic difficulties, it may take longer for implementation of these tools to take the intended effect. In fact, an article by Fazel Shokoofeh questions the effectiveness of monetary policy “with respect to affecting mortgage rate and thus investment and aggregate demand” (Shokoofeh

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