The term ‘Monetary Policy’ refers to what the Federal Reserve (Fed) and the National Central Bank does to influence the amount of money and the credit of the U.S. Economy. What happens to money and credit affects the interest rate and the performance of our economy. The definition of the Monetary Policy is the regulation of the money supply and interest rates by the central bank and the Federal Reserve Board, in order to control inflation and stabilize the currency. The Monetary Policy is one way the government can impact the economy.
The goals of the Monetary Policy is to maximize employment, stabilize prices and moderate interest rates. The Monetary Policy is the management of expectations of the economy, supporting the long-term economic growth and employment. The Monetary Policy is the relationship of interest rates and the economy, the price at which money can be borrowed and the total supply of money. The Monetary Policy began in the 19th century to maintain the gold standard. Today the monetary authority has the ability to alter the money supply. The most powerful person (after the president) in the United States is the chairman of the Board of Governors of the Federal Reserve System. The person that controls the money, controls the world.
There are three instruments (tools) the Federal Reserve uses to implement the Monetary policy, open market operations, the discount rate, and reserve requirements. In the open market operations the securities dealer compete on the basis of price to do business with the Fed. This tool consist of Federal Reserve purchases and sales of financial instruments (securities) from the U.S. Treasury, Financial agencies or other government sponsored enterprises. Trading securities the Fed influences the amount of bank reserve, that affect the federal fund rate, and the overnight lending rate that banks barrow reserves from each other. Open market operations are flexible and the most frequently used in the Monetary Policy.
The federal fund rate is highly sensitive to changes in the demand for the supply of reserves in the banking system. The discount rate is the interest rate charged by the Federal Reserve Banks to the depository banks on the short-term loans. Lastly, is the Reserve Requirements, the portion of the deposit amounts the bank must keep to cover amenities.
The Federal Open Market Committee (FOMC) is the group that formulates the nation’s monetary policy. The chairman of FOMC is, none other than, the chairmen of the Board of Governors. The voting members of FOMC consist of seven members of the Board of Governors (BOG), the president of the Federal Reserve Bank of New York, and four other president of Reserve Banks. These members serve in one year rotating basis, and all Reserve Bank presidents participate in FOMC policy discussions. FOMC meets eight times a year to discuss the U.S.
Economy and the monetary policy options. After FOMC meetings the committee issues statements that include the federal fund rate target. To implement the policy’s actions the Committee issues a directive to the NY Fed’s Domestic Trading Desk, that guides the implementation of the Committee’s policy through the open market operations. The open market operations are conducted on a daily basis to prevent technical forces that can effect federal fund rates from the target rates.
Monetary and fiscal policy are different animals, but animals the same. A Monetary Policy is the process by which the monetary authority of a country controls the supply of money, by targeting interest rates for the purpose of economic growth and stability.