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How Far Does The Federal Reserve Affect The Economy

416 Words2 Pages

As prescribed in the U.S. Federal Reserve Act of 1913, the Federal Reserve was given the authority to set the monetary policy for the betterment of employment and stabilization of market prices (Keefe, 2016; Kidwell, Blackwell, Whidbee, & Sias, 2016, p. 82). The monetary policy can somehow “control” the money supply. It can be called as “expansionary” if it can able to enhance the money supply, thereby resulting to a decrease in interest rate. On the other hand, it can be called as “contractionary” if it can lower the money supply that can consequently increase the interest rate (Keefe, 2016; Kidwell, 2016, pp. 72,75). Furthermore, the Federal Reserve can somehow affect the supply and demand of reserve balances of commercial banks via a central bank (through open market operations, discount rate and reserve) and can eventually alter the federal funds rate. The federal funds rate refers to the interest rate that banks can use in lending their extra reserve funds from the Federal Reserve to other banks that are deficient with reserve based on the system’s quota (Keefe, 2016). …show more content…

It can also remedy some of the adverse conditions in certain business operations. The Federal Reserve can lower the interest rates during economic recession and weakening of product / service demand to “stimulate” the economy as temporary remedy and stabilize the volume of production in the longer-term (Keefe, 2016; Kidwell, 2016, 88). It may not control the over-all economy “perfectly (Keefe, 2016); however, it can act as a stabilizing factor or remedial intervention for significant unbalances or negative conditions in an

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It is when the Federal Reserve purchases and sells securities in the open market in order to expand or contract the money in circulation. The goal of implementing open market operations is to control interest rates. To increase interest rates the Feds will sell securities to banking institutions. To decrease interest rates the Feds will buy securities from these banking intuitions (Amadeo). Any type of depository institution must meet reserve requirements.

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With its power to stabilize the financial industry and consolidate monetary policy under a single body, the Federal Reserve is a vital component of the US economy. The independence of the Federal Reserve, which spares it from the influence of political demands, is one of the institution's advantages. This independence aids in keeping the Fed from adopting measures that could be advantageous for reelection in the short run but would cause long-term economic harm down the road. In addition, the Federal Reserve's function as a lender of last resort to commercial banks guarantees that banks will always have access to money when they need it and contributes to the stability of the banking system. The Fed has been successful in lending money to banks

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Should The Federal Reserve Use Open Market Operations?

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The Federal Reserve uses Open Market Operations as their primary tool of monetary policy. It's favored because it is flexible, which means it can used on short notice. The Federal Reserve actually uses it everyday, but to a lesser extent, it's only when the economic situation is more severe that they use it to a greater extent. OMO works by buying and selling government bonds, which influences the base money supply as well as interest rates. This in turn affects the aggregate money supply, expanding or shrinking it.

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Describe How Expansionary Activities Conducted By The Federal Reserve

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The Federal Reserve is one of the most powerful entities we have in the United States. The decisions that are made by the Federal Reserve will have an impact on every person that is living in the country of the United States and will have an impact on the global market. Two ways that the Federal Reserve may impact a person’s life and the global market are by inflation and monetary policies. Inflation is the sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. (Investopedia)

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The lowering of interest rates also promotes consumer spending. During an economic crisis, the Federal Reserve helps the economy by providing more employment. The Federal Reserve is an independent bank. This means it operates separately from Congress and the president, minimizing political influence and pressure. Overall, they use their power to promote economic growth.

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Monetary policy is an essential tool that maintains economic stability. The Federal Reserve System uses those policies according to the necessities of the economy, when it needs an expansion or a contraction. Open market operations, discount rate and reserve requirement are some tools that the Fed uses. Each and every one of them present advantages and disadvantages when used.

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To affect change in the overall monetary policy, Federal Reserve banks have multiple tools available to them, which include: open market operations, discount lending, and reserve requirements (Mishkin & Eakins, 2012). Out of those three tools, open market operations are described to be the most important of tools available due to their leading role in determining interest rates and changes in the reserves. The objective of using the open market operations is to keep interest rates at a target level through the sales and purchases of securities (Open Market Operations, 2013). Another way of explaining this concept would be that the Fed purchases securities to increase the reserves and monetary base. Alternately, the reserves and monetary base

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Louis, 2016). As we have already discussed, the Federal reserve can affect interest rates by manipulating the money supply; Open Market Operations are just another way to do that. By purchasing bonds from private banks, the Federal Reserve directly increases the amount of money a bank has available for lending to businesses and individuals, which in turn decrease interest rates and vice versa (Federal Reserve Bank of St. Louis, 2016). The federal Reserve can also influence the money supply by purchasing Trading Securities, with the added effect of higher security prices.

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The Federal Reserve System is the central bank of the United States of America and it is arguably the most powerful central bank in the world. It has a number of different purposes which centre around aiming to promote a healthy US economy. In order to promote a healthy economy, the Federal Reserve System must aim to maximise employment and to stabilise prices. A high employment rate and stable prices make planning for the future easier for firms and households and allow for more economic opportunities. So in order to achieve its aims the Federal Reserve System must implement effective monetary policy.

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1101 Words | 5 Pages

The Federal Reserve had the power to manipulate the money supply in the economy in order to promote economic growth, but during the Great Depression, it had failed to do so. Friedman and Schwartz stated “For it is true also, as we shall see, that different and feasible actions by the monetary authorities could have prevented the decline in the stock of money-indeed could have produced almost any desired increase in the money stock. The same actions would also have eased the banking difficulties appreciably. Prevention or moderation of the decline in the stock of money, let alone the substitution of monetary expansion, would have reduced the contraction's severity and almost as certainly its duration” (qtd in Barber 435). Friedman and Schwartz therefore saw the policies pursued by the Federal Reserve as a factor that increased the length and severity of the Great depression, rather than a major cause for it.

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