Federal Reserve Responsibility For Setting Monetary Policy example essay topic
Using these tools, 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 federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The point of implementing policy through raising or lowering interest rates is to affect people's and firms' demand for goods and services. Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables. This shows how policy actions affect real interest rates, which in turn affect demand and ultimately output, employment, and inflation. Monetary policy can be quickly altered and can affect money supply and investments very fast thus making speed and flexibility one of its strength.
Members of the Feds board are appointed a 14 year term. This isolates them from lobbying so therefore no political pressure to contend with. The tight monetary policy helped the economy succeed from 1980 thru to 1990 by bringing down the inflation rate. Monetary policy is not all strengths there are weaknesses also associated with this policy. One weakness is the growth of electronic transactions.
These transactions have made it easier for people to move money to and from accounts within the financial industries, therefore giving the Feds less control of the money supply. Another weakness is changes in velocity which will frustrate the monetary policy. This works against the Feds in time of inflation and recession. Monetary policy is less reliable in pushing the economy out of recession causing the economy to suffer from cyclical asymmetry..