The Federal Reserve

The Federal Reserve
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Abstract
Monetary policies aim to stabilize prices and maintaining high employment, with changes in the interest rates affecting expenditure by households and businesses. Even as the Fed seeks to influence the aggregate demand, there are uncertainties about the effectiveness of the policy alternatives. As such, employment levels and inflation are the economic indicators that guide the Fed’s monetary policies. The monetary policies are implemented faster compared to fiscal policies that require Congressional input. The three tools of monetary policy are federal funds rate, open- market operation and setting reserve requirements for banks. The AD/ AS framework also demonstrates the effects of reducing the interest rate and increasing the money supply thou open market operations. Introduction
Policy makers are concerned with promoting employment promote maximum output and stabilizing prices. However, monetary and fiscal policies are not the only factors that affect the economic outlook and employment in the long run. The people’s work effort, preference for risk taking saving, and the levels of technology have affected economic output in the long run. Economies go through cyclical changes just like businesses affecting the output and employment. The monetary policy has a more profound impact in the short run, as the Fed is better placed to stabilize the U.S economy in order to achieve the intended output and employment levels in the long run.
[1] Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.
Depository institutions trade through the Federal Reserve bank and the federal funds rate is established through the demand and supply of the trade balances. The Federal Reserve (Fed) uses the monetary policies to stabilize prices long term interest rates, and promote maximum employment (Labonte, 2015). However, the policy makers face a challenge since it may be difficult to achieve the goals in the short-term, where there is lack of information. Stable prices are singled out as being important to the success of the Fed as they influence productivity, sustainable output growth as well as the interest rates. Stable prices are important since the economy is unlikely to face inflationary pressures and there is better allocation of resources. The Fed mainly influences credit availability and the cost of money through monetary policies.
The monetary policy changes have a direct impact on the US economy as they affect the dollar exchange value. For instance, in cases where the interest rate has risen, then the yields denominated in US dollars are more favorable, and there is increased demand for the dollar in the foreign exchange markets. In such a case the rising dollar is associated with lower cost for the importers but the US exports become more expensive in the international markets. On the contrary, lower interest rates result in a lower dollar exchange value and the price of exports decline while the cost of imports rises.
The Fed has mostly eased the monetary policies since the 2008/2009 financial crisis with the aim of improving the economic outlook and employment levels (Labonte, 2015). The need to improve the aggregate demand is a concern since there is a need to improve the counter’s productive capacity. The economy then improves as a result of sustained growth and rise in unemployment. However, there have been challenges in reducing the unemployment because of uncertainties. Policy makers use estimates on prices, production and spending, but the lag effects means that not all that is necessary is captured. Additionally, the US dollar has risen in value compared to the other major currencies further making it harder for US exports to be competitive in the international market. 2. Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy.
The Fed still needs to focus on inflation and unemployment as the key economic indicators, since policy makers explore how to achieve full employment and stable prices (Labonte, 2015). Even though, there is uncertainty in the markets, the stock price and interest rates are intertwined with the monetary policy. As such, the open market operations that focus on either the purchase or selling of financial assets and the federal fund rate are the factors influencing how the banks lend. The effects of the recession have had long lasting effects highlighting the need to keep the fed fund rate low since the GDP growth rates have been slow. The targeted federal fund rate has been maintained to ensure price stability. Even though, the asset buy-back has slowed down, it may be renewed with view of stimulating the economy.
The Fed checks the Consumer Price Index (CPI) and core inflation which indicate the changes in consumer prices. The Fed does not directly influence the inflation rate, which is dependent on various variables. However, through monetary policy targets, the Fed sets targets to be achieved since money supply and interest affect various spheres of the economy. Depending on the economic situation, the Fed uses interest rate to either to provide price stability and achieve full employment. This is especially when there are shocks to the economy. However, open market operations may not be sufficient to achieve the indented outcomes. However there is no consensus on whether the Fed ought to put in place more regulations, but monetary policies are chosen depending on the economic situation and market expectations.
One of the reasons for changing the interest rate is to influence the economy by affecting the demand for goods and services for both firms and the people. The short- term interest rates are affected by the federal funds rate, and expectations about the rates (Labonte, 2015). Higher or lower than expected federal funds rates, are associated with / lower short-term interest rates. The changes in the interest rates influence the demand for goods and services through altering the borrowing costs including that of bank loans, foreign exchange rates, and wealth of household. A decrease in the real interest rates makes borrowing more affordable resulting in increased investment spending and purchase of durable goods. This is especially when the economy is improving and the banks are more willing to lend when they have confidence in the economic outlook.
3. Describe which monetary policies the Federal Reserve might use to influence the money supply.
Monetary policy relates to the actions of the Fed to influence the supply of money and economic growth while controlling inflation. The changes in the supply of money in turn affect the cost of credit / interest rates as well as the performance of the American economy. The open- market operation is one of the monetary policy opt...