Federal_Reserve_Paper

Federal Reserve Paper The purpose of money is a standard measure of value to be exchanged for goods and services. The main functions of money are: a medium of exchange; a unit of account; a store of value. The Federal Reserve is the country’s central bank. The Fed’s primary mission is to ensure that enough money and credit are available to sustain economic growth without inflation. If there is an indication that inflation is threatening our purchasing power, the Fed may need to slow the growth of the money supply. It does this by using three tools the discount rate, reserve requirements and, most important, open market operations. Responsibility for open market operations rests with the Federal Open Market Committee (FOMC). The committee, consisting of the seven-member Board of Governors and five of the 12 Reserve Bank presidents, meets eight times a year. The governors and the president of the New York Fed are permanent voting members; the other Reserve Bank presidents fill the four remaining voting-member positions in rotation. All 12 presidents participate fully in FOMC discussions. Reserve Bank boards of directors, research departments and regional business leaders contribute information and insights that are used to formulate monetary policy. The Reserve Bank boards recommend changes in the discount rate to the Board of Governors, and the Board of Governors has jurisdiction over reserve requirements. In this way, both the public and the private sectors contribute to these decisions. (Dallas, 2010) Recent monetary policies are more of the same in recent statements by the fed. Interest rates will remain unchanged, and they may consider buying more mortgage backed securities to help stimulate the economy. This will be considered as a long shot as the chairman of the Federal Reserve, Ben Bernanke is not too sure it will provide much growth. An example of this is the central bank has already bought $1.5 trillion of mortgages and U.S government bonds which led to very little movement in economic growth. Mr. Bernanke would also consider additional federal stimulus packages if congress would also put in a plan to phase out and lower National deficit at the same time. With a lack of good ideas circulating throughout the Fed then we should expect more of the same results over time. (Wessel, 2010) Monetary policies have a direct correlation on an economy’s employment and production. Let’s take interest rates as an example. Changes in real interest rates affect the public's demand for goods and services mainly by altering borrowing costs, the availability of bank loans, the wealth of households, and foreign exchange rates. For example, a decrease in real interest rates lowers the cost of borrowing, that leads businesses to increase investment spending, and it leads households to buy durable goods, such as autos and new homes. In addition, lower real rates and a healthy economy may increase banks' willingness to lend to businesses and households. This may increase spending, especially by smaller borrowers who have few sources of credit other than banks. Lower real rates also make common stocks and other such investments more attractive than bonds and other debt instruments, as a result, common stock prices tend to rise. Households with stocks in their portfolios find that the value of their holdings is higher, and this increase in wealth makes them willing to spend more. Higher stock prices also make it more attractive for businesses to invest in plant and equipment by issuing stock. All of these changes in spending habits lead to higher productivity and employment. (Federal Reserve Bank of San Francisco, 2010). So one can see how we all depend on the policies of the Central bank and their plan of action. Board of Governors of the Federal Reserve. (2010, July 21st). Monetary Policy. Retrieved from www.federalreserve.gov: http://www.federalreserve.gov/monetarypolicy/mpr_20100721_part1.htm Dallas, F. R. (2010, July 31). Everyday Economics. Retrieved July 31, 2010, from www.dallasfed.org: http://www.dallasfed.org/educate/everyday/ev4.html Federal Reserve Bank of San Francisco. (2010, June 21). About The Fed. Retrieved June 21, 2010, from www.frbsf.org: http://www.frbsf.org/publications/federalreserve/monetary/affect.html Wessel, D. (2010). The Lay of the Land, as Seen From Bernanke's Perch. The Wall Street Journal , 1.