Us Monetary Policy : Flying Blind

There has been a notion that financial crises are “black swan” phenomenon, which do not happen often at all. This notion, unfortunately, is absolutely a myth. In the last forty years alone, there have been a total of thirty financial crises worldwide. Even though our project is only concerned with the economy growth in the U.S., the concept of borderless has existed for a long time. A financial crisis happens in Europe can have a very clear effect on the rest of the world, and vice versa. The Federal Reserve (the Fed) has always reacted accordingly, though at times more appropriately than others. Along with other tools, the Fed relies heavily on the adjustment of the Fed fund rate through the Federal Open Market Committee (FOMC). This is the

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.

All day and all night, they battled the emergency with each instrument available to them to keep the United States and world economies above water. Working with two U.S. presidents, and under flame from a crabby Congress and an open angered by conduct on Wall Street, the Fed—nearby associates in the Treasury Department—effectively settled a wavering monetary framework. With inventiveness and definitiveness, they kept a financial fall of incomprehensible scale and went ahead to create the strange projects that would resuscitate the U.S. economy and turn into the model for different nations. Rich with detail of the basic leadership prepare in Washington and permanent representations of the real players, The Courage to Act relates and clarifies the most exceedingly bad budgetary emergency and monetary droop in America since the Great Depression, giving an insider 's record of the approach reaction (http://www.forbes.com/sites/richardsalsman/2012/03/06/five-financial-reforms-that-would-prevent-crises-and-promote-prosperity/#).

“The Central Bank also raised concerns about the Feds lower interest rate encouraging rising demand for junk bonds and risky real estate investments and shifts in bank balance sheets as areas of concern. Mr. Bernanke said the Fed took these concerns very seriously and noted the central bank had significantly widen its efforts to monitor financial markets as well as greater priority to financial

The Federal Reserves concerns are many; because of the economic diversity of our country. In November 2002, the fed reduced the targeted federal funds rate 50 basis points, to 1.25 percent. The policy easing allowed the Committee to return to an assessment that the risks to its goals were balanced. The Fed has inflation expectations well contained, and the additional monetary stimulus seemed to offer worthwhile insurance against the threat of persistent economic weakness and substantial declines in inflation from already low levels.

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

Had the Fed kept to one school of thought instead of vacillating between predictions of doom and gloom and then back again to all is well our nation might have bounced back more quickly from the burst bubble and the recession (Lowrey, 2014). It is this vacillation and “wait and see” attitude that clouds many economists’ thinking. Most of the time making small adjustments to the market and waiting it out is okay, but when things start to fall apart some vision is needed to spur the Fed into action and prevent another crisis. According to Mark Thoma at The Fiscal Times:

“The Federal Funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which has bearings on key aspects of employment, growth and inflation” (Phoenix). Unfortunately, changes in the federal funds rate produces a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the quantity of money and credit, and, eventually, a range of economic variables, including employment,

In other words, Monetary policy can be looked at as a policy that is money-based that involves banks that manage liquidity to create the growth of money. This includes the use of checks, cash, and credit that are used in the money market as primary ways of investing money. The most important of these is credit would be one of the most important tools used in the market because it consist of loans that are written promises to pay money back. Within every policy that every nation has there will always be an objective at hand. The U.S. Federal Reserve, like many other banks around the world, has clearly stated targets for their goals. They look for a certain percent of people who want to work but cannot find a job and the find that the rate of

1. The Fed should direct the monetary policy of the U.S. In doing so it will, “promote employment, stable prices, and moderate long-term interest rates.” In order to achieve such requests the Fed will have to change the

This gathering of governor was joined by leading academics, thought leaders, and commentators on monetary policy. The world of modern central banking and global finance had now entered a new phase of even more obvious artificiality and distortions. According to the author, Mohamed. El-Erian, “Ones whose skillful management of the price and quantity of money in an economy was key to containing inflation, promoting economic growth, and avoiding financial crises.” Since the global financial crisis of 2008, central bank has ventured, by necessity but not by the choice. They set the interest rates higher. For an unusually prolonged period, the central bank was bold policy experimentation. During that time, many of the economists thought that central banks had been forced to operate, and many of them wondered about it consequences. From the beginning of the financial crisis, there was the hope that courageous and responsive central banks would succeed in handing off the baton to high growth, robust job creation, price stability, and financial system. The world was in the process of grow out of its debts problems avoiding the debt defaults because the policy making entities were finally in the economic governance responsibilities and with the job returning and economic prosperity. The world changed in two important ways: one had to do with the analytics of central banking,

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.

“Ultimately, market participants themselves must address the fundamental sources of financial strains – through deleveraging, raising new capital and improving risk management.”1 – Ben Bernanke

The Fed has put into place an extraordinary amount of monetary accommodation over the past few years. Continued declines in the unemployment rate are expected, but there are a number of FOMC members who are wary that the Fed could be caught badly behind the curve in terms of removing this accommodation once unemployment nears its natural rate (just below 6%). In order to prevent this risk, tapering asset purchases makes perfect sense, even though the Fed remains some way off from achieving its dual mandate. Under current circumstances, the Fed can be said to possess a so-called hawkish reaction

Ever since the first rise in the federal funds rate last December, the Federal Open Market Open Committee (FOMC) has been repeatedly frustrated in its attempt to continue policy normalisation. Firstly, tightening financial conditions in January forced the FOMC to embrace dovish policy rhetoric. Markets subsequently declared victory over the Fed, but they consequently embraced an overly-optimistic view about how monetary policy would unfold for the rest of the year. Secondly, there was a clear deceleration in economic activity in Q1 that frustrated the more hawkish FOMC members. Last week’s policy meeting was, therefore, always going to be the earliest opportunity for the FOMC to further raise its policy