Federal Reserve System-Monetary Policy
Federal Reserve is the United States central bank which was formed in 1913 by an Act of Congress. It is an independent body although it has to carry its duties with the frameworks established by the Congress. It is headed by the Federal Reserve Board which is bestowed with the authority and powers to regulate the direction of the economy in the country. According to Federal Reserve Board (2008), their main functions include: Open Market Operations (OMO), reserve limits and discounts rates determination. Federal Reserve Board executes it duties using monetary policy tool. This policy may have impacts on the various aggregates of the economy such as inflation, interest rates, exchange rates, capital expenditure and individual expenditure. Monetary policy function such as lending interest rates limit influences the banking sector as the banks have to adhere to the directives of the Federal Reserve. Again, monetary interest lending policy also influence exchange rates and global capital flows. This is because monetary policies are responsible in maintaining domestic economic policies which determines interest rates as well as investment levels. However, despite the Federal Reserve Board given the mandate of steering the economy into the right direction, it has received criticism from various groups in the country. The criticisms have erupted from the diverse groups ranging from Liberals to Conservatives. Federal Reserve Board has being accused of not being democratic and unable to address the interests of the American people appropriately. This is a Student Sample ORDER YOUR PAPER NOW
One of the core function of the Federal Reserve System is to control inflation by regulating the amount of the money circulating in the economy (König & Pothier, 2015). However, the Federal Reserve should not focus exclusively on inflation without putting into consideration other aggregates of the economy. The Federal Reserve should only minimize inflation up to the acceptable levels. If the inflation rates are too low, interest rates in the short term will be affected, and they will drop almost to zero, and thus the Federal Reserve may find it difficult to lower the interest rates when there is a need to stimulate the economy.
In addition to maintaining the rate of inflation at the acceptable level, the Federal Reserve System should also ensure that the country is operating at the stable prices and maximum level of employment (Federal Reserve Board of Governors , 2008). Price stability involves having a low-inflation economy whereby the businesses and households can make effective and efficient financial decisions. On the other hand, employment entails the number of jobs created as the results of increased production and output in the economy. Monetary policy has the great impacts on these two basic goals.
According to Labonte (2016), low inflation has a significant effect on the interest rates especially when the Federal Reserve wants to lower them as the way of stimulating the direction of the economy. Similarly, at high inflation rate will result in an economic crisis such as volatile inflation. Therefore, the appropriate level of inflation which will ensure smooth running of the economy should be maintained at two percent per annum (Labonte, 2016).
Federal Reserve Board apply facilities such as interest rates, commercial banks reserve limits, and open market operations to attain its monetary policy goals. Federal Reserve put a ceiling on commercial bank lending rates by regulating the charges rates to commercial banks on short-term loans. On the other side, the reserve requirement is the amount the banks should hold in cash. The Federal Reserve sets this limit to regulate money that commercial banks can avail to consumers for borrowing. Finally, open market operations, entails Federal Reserve buying and selling the United States securities and bonds. This enables the Board to regulate money supply in the United States economy.
Federal Reserve Board has been very effective in ensuring it core goals have been achieved. This is attributable to the explanation of the Federal Reserve policies clearly to the public. Effective communication of the policies has enhanced transparency and accountability, reduced financial and economic uncertainties as well as enabling informed decision making among the businesses and households.
According to Razza, Speer, & McMenamin (2016), the Federal Reserve has been in pressure from various groups across the nation to modify its governance and adopt policies that represents the interests of the American people. The decision-making bodies are accused of not having elements of democracy. Federal Reserve has severally failed to cater for needs of women, employees, consumers, and communities (Razza, Speer, & McMenamin, 2016). Besides, the boards are characterized by inadequate sectoral boards on regional diversity, inequality in gender and race representation and lack of diversity among the regional presidents. This is a Student Sample ORDER YOUR PAPER NOW
Board of Governors of the Federal Reserve System. (2008). The Federal Reserve System: Purposes Functions. Washington, DC: Board of Governors of the Federal Reserve System.
König, P., & Pothier, D. (2015). Bubbles and Monetary Policy: To Burst or not to Burst? Berlin: DIW Berlin.
Labonte, M. (2016). Monetary Policy and the Federal Reserve: Current Policy and Conditions. Washington: Congressional Research Service.
Razza, C. M., Speer, J., & McMenamin, A. (2016). “To Represent The Public” The Federal Reserve’s Continued Failure to Represent the American People. Washington: Center for Popular Democracy.