Eco212

Federal Reserve and Monetary Policy Money is the medium of exchange for goods or services. Money is also used to measure the values on the commodities in the market. There is a direct relationship between money and price. When the price of a commodity increases, then the value of money decreases. According to Mankiw (2007), this direct relationship between the prices and the value of money gives a clear understanding of the impact of money on the economy. Essentially, the primary goal of the United States monetary banking system is to maximize production and employment by balancing the relationship between money and price. This goal is accomplished through the Central Bank of America, more commonly known as the Federal Reserve Bank. The Federal Reserve System is responsible for the regulation of the money supply and circulation of currency in the country. The Federal Reserve manages the economy through the monitoring and governing of banks. To perform this huge task, they have organized the Federal Open Market Committee (FOMC). This committee meets regularly to discuss economic concerns and to make changes as soon as they arise. The Committee overseas everything from shortages of money to regulating of fair banking practices. The committee deals with long-term and short-term monetary issues including money shortages, inflation, deflation, and even the current mortgage crisis the country experienced (Federal Reserve Bank, 2010). For instance, if the committee identifies an economic problem, they will immediately inform the Federal Reserve. The Federal Reserve would then take necessary action. In an example, suppose the committee sees that the housing market is beginning to dip. The committee will inform the Federal Reserve and in turn the Fed will lower interest rates to boost housing sales. Lowering of interest rates can be a significant action as the interest rates on car loans, personal loans, and commercial loans are affected. The lower of interest rates is referred to as Discount Rate which is one of many policy tools used by the Fed to affect monetary change (Federal Reserve Bank, 2010). The current monetary policy of extreme importance has been in the role of the Fed for monitoring the banking system with increased supervision. Here the FOMC outlines its concerns with the Fed, “All individual financial institutions that are so large and interconnected that their failure could threaten the functioning of the financial system must be subject to strong consolidated supervision (Image of Seal of the Board, 2010).” The committee is referring to the fall of Bears Stearns, Fannie Mae, and Freddie Mack. The fear is that this catastrophe could happen again without banking supervision. The vital question that was posed by the current problems has been with regard to the ‘ability’ of the Fed to manage effectively these massive banking and mortgage institutions. In this the case the committee answers, “As a result of its central banking responsibilities, the Federal Reserve possesses expertise in those areas that is unmatched in government and that would be difficult and costly for another agency to replicate (Image of Seal of the Board, 2010).” The economic ramifications of increased Fed supervision are arguably beneficial and negative. By monitoring the banking industries in greater detail with regard to mortgages and loans the Fed will be safeguarding taxpayers by making sure that loans follow specific guidelines and lending practices. The use of substandard lending will fade and thus the risk of financial collapse. However, the process of lending will significantly increase in time consumption because of the government involvement. Loans will become increasingly more difficult to obtain because of the strict guidelines that must be followed. As well, the qualifications for loans will be difficult. It is easy to see how the Fed’s monetary policies are far reaching affect many aspects of the economy. In this instance, if the Fed assumes greater control of the lending industry, the long term effects on the country will be seen not just in the lending industry but also in the building and construction industry. If homes become harder to buy, the demand for them will decrease and builders will decrease production of them. This will mean loss of jobs in the construction fields and in the lending industry, but this change may be necessary for the Fed to ensure a stable housing and lending market. References Federal Reserve Bank,. (2010, July). Monetary policy. Retrieved from http://www.federalreserve.gov/monetarypolicy/default.htm Heshmeyer, M. (2009). Real World Economics, Dollars & Sense. Retrieved on April 20, 2010 from http://www.dollarsandsense.org/blog Image of Seal of the Board,. (2010, January 13). The Public policy case for a role for the federal reserve in bank supervision and regulation. Retrieved from http://www.federalreserve.gov/BoardDocs/RptCongress/supervision/supervision_ report.pdf Mankiw, N. (2007). Principles of Economics (4th ed.). Mason, OH: Thomson South-Western