U.S. Federal Reserve’s Monetary Policy Essay

Custom Student Mr. Teacher ENG 1001-04 20 February 2017

U.S. Federal Reserve’s Monetary Policy

The existence of a global financial crisis was strongly felt in the latter months of 2007 and more so, in 2008. A number of countries all over the world have been largely affected by this monetary problem. Developing countries and even the rich ones suffered much from this crisis that resulted for many of them to declare recession with regards to their economies’ income. In line with this, great interest coming from economic analysts and even from the general public are observed regarding the monetary reserves of their respective countries.

As such, it is very essential that people are well-informed about the monetary policy of their country as this greatly concerns them. Definition and Function of Money Money is defined as “the most common medium of exchange and functions as a legal tender” (Princeton University, 2006). Most people also use money as a determinant factor of the wealth of an individual, group of people, or company. Moreover, money is also regarded as the official currency that is issued by a government or national bank of a country (Princeton University 2006).

Money has four main functions namely: medium of exchange, unit of account, standard of deferred payment, and store of value. First and foremost, it is a medium of exchange because people usually give money in return for products or services that they want to purchase. Second, money functions as a unit of account wherein the values are stated, recorded and settled. However, there are instances in which the unit of account is dissimilar from the unit wherein the medium of exchange is expressed. Third, the standard of deferred payment is the unit wherein debts contracts are stated.

It stands for payments that are to be made in the future. Fourth, the store of value is something that people keep so that they could maintain the significance of their wealth. This pertains to the money that is set aside for future use (Drexel University, n. d. ). Central Bank Institutions like the central bank, reserve bank, are the ones responsible in regulating the amount of a nation’s money supply, the availability and cost of credit as well as the foreign exchange value of its currency.

Central banks serve as a fiscal agent of the government. Its functions include issuing notes that are used as legal tender, supervising the operations of commercial banking system, and implementing monetary policy. The central bank also has a large influence in the economy of a country because they have the ability to increase and decrease the supply of money and credit, which can affect interest rates.

In relation to this, modern central banks also regulate the money supply by buying and selling assets. This kind of institution may also raise or lower the discount rate that can either discourage or motivate borrowing by commercial banks. Central banks can contract or expand the money supply by means of adjusting the reserve requirement. Their main objective is to sustain the conditions that support a high level of production and employment as well as stable domestic prices.

Moreover, central banks also have an important role in cooperative international currency arrangements that are established in order to aid in regulating the foreign exchange rates of participating countries (Encyclopedia Britannica, 2007). Monetary Policy in the United States The economy of the United States experienced sluggishness in the first half of 2008 together with increases in commodity prices that heightens consumer price inflation. This is further worsened by the mounting losses acquired by major financial institutions.

The condition of the financial market substantially deteriorated during the end of the first quarter, which threatens to severely impair the whole financial system and hinder the economic growth of the country (Board of Governors of the Federal Reserve System, 2008). Being the case, the Federal Reserve System implemented a monetary policy that will address the liquidity pressures experienced by banks and other financial institutions. By doing so, they could augment the liquidity-enhancing measures that they have implemented in the second half of 2007.

The implementation of this policy has indeed made some improvements in the financial markets but there are still some constraints. In line with the reduction in credit availability as well as the persisting decrease in housing activity, the Federal Open Market Committee (FOMC) made the necessary actions to further ease the stance of the monetary policy. The FOMC reduced rates by another 225 points during the first month of 2008 even after they have cut the federal funds rate by 100 basis points in the second half of 2007.

The Federal Reserve perceived that the further easing of policy coincides with maintaining price stability over time especially with the Committee’s expectation of flattening-out the process of energy and increasing economic slack would damp the pressures of inflation (Board of Governors of the Federal Reserve System, 2008). Nevertheless, despite the efforts of the Federal Reserve to maintain the economic stability of the country, the demand for labor in the year 2008 has been contracting. The civilian unemployment rate increased by more than ? percentage point to 5 ?

percent. Job losses were highly concentrated in the construction and manufacturing sectors. In addition, there had also been job losses in the wholesale and retail trade sectors as well as in the professional and business services. The increase in unemployment rate could be attributed to most firms’ decision to continue cutting back on hiring due to the worsening economy (Board of Governors of the Federal Reserve System, 2008). In terms of the productivity of the country’s economy, there is an observable increase in the non-farm business sector.

Despite the fact that firms are laying off workers, their output increased by 3 ? percent during the year ending in the first quarter of 2008. Because of the financial crisis that is happening in the international market, firms have decided to concentrate on improving technological change like information technology in order to increase their productivity and compensate for the decrease in the number of their workers (Board of Governors of the Federal Reserve System, 2008).

References

Board of Governors of the Federal Reserve System. (2008). Monetary Policy Report to the Congress. Drexel University. (n. d. ). Functions of Money. Retrieved January 11, 2008, from http://william-king. www. drexel. edu/top/prin/txt/money/funx. html. Encyclopedia Britannica. (2007). Central Bank. Retrieved January 11, 2008, from http://www. encyclopedia. com/doc/1B1-360162. html. Princeton University. (2006). Money. Retrieved January 11, 2008, from http://as200l. princeton. edu/perl/webwn? s=money.

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