Federal_Reserve_Paper

University of Phoenix ECO/212 – week 5 Federal Reserve Paper The National Association for Business Economics said on that 60 percent of 242 members surveyed from July 30-Aug 10 said monetary policy was "appropriate" for the conditions the economy currently faces. The Fed kept benchmark overnight interest rates steady in a zero to 0.25 percentage point range at its last policy meeting on August 10 and renewed a pledge to keep them low for an extended period. Some 67 percent felt the Fed's decision at the August 10 meeting to use cash from maturing mortgage bonds it holds to buy more government debt was helpful in the face of a weakening economy. That move keeps the Fed's balance sheet from running down. In the near term, 45 percent of respondents believed monetary policy risks now were tilted toward deflation, or falling prices, in the short run but toward inflation in the longer term. The Fed has sought to keep ample liquidity in the financial system in a bid to spur lending, but some analysts say it may be difficult to remove that liquidity quickly enough in the future to ward off the risk of an inflationary price spiral. About half feel the Fed will start tightening too late, and a similar share think the recently passed financial regulation bill will modestly reduce the risk of another global financial crisis. There seemed to be considerable skepticism among the economists on other matters. Fully 89 percent thought the recently passed sweeping overhaul of the financial regulatory system would have only modest effect in avoiding another crisis, and only 3 percent said it would significantly cut future risk. The economists generally opposed letting tax cuts put in place in 2003 by the former Bush administration expire on schedule at year-end and doubted that a group established to find ways to shrink deficits will produce anything of value. A resounding 81 percent think the bipartisan National Commission on Fiscal Responsibility and Reform will be unable to produce a credible plan capable of garnering congressional support," the survey found. The commission is to identify policies that would be effective in shrinking the huge shortfall between the government's income and its spending and to produce a report with recommendations by December 1. Money is any object that is generally accepted as payment for a good or service and repayment of debts in a given country. The main functions of money are distinguished as a medium of exchange, a unit of account, a store of value and occasionally a standard of deferred payment. The United States lacked a central bank until the twentieth century, although there were two attempts to establish a central bank in the early 1800s. Without a money manager, the nation's financial system was like the nation itself, diverse and subject to uneven growth. As a result, there were frequent economic depressions and financial panics, and the Bank Panic of 1907 finally convinced the public that a central bank was necessary. Reform was difficult. In the more established eastern cities, business leaders wanted to create a national financial system. In the West and South, small businesses and farmers feared a national financial system would not provide enough easy credit to support their developing economies. In 1913, after considerable debate, Congress passed the Federal Reserve Act to balance the financial needs of the country. The Federal Reserve, often called the Fed: manages our nation's supply of money and credit and operates at the center of the nation's financial system; keeps the wheels of business rolling with currency, coin, and payments services, such as electronic funds transfer and check-clearing; serves as the banker for the federal government by providing financial services for the U.S. Department of the Treasury; and supervises and regulates a large share of the nation's banking and financial system; and administers banking and finance-related consumer protection laws. One of the policies the Fed put in play was its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets and with this, adding even more anxiety to an already dire situation. Price stability is currently a central focus of U.S. monetary policy. Because of well-known policy lags and the need for policy action, the Federal Reserve necessarily uses indicators to help attain its inflation goals. Currently, there is disagreement among economists as well as Federal Reserve policy makers as to the proper set of intermediate indicators to use in conducting a price stabilizing monetary policy. Market price indicators are such an alternative useful set of guides to a price stabilizing monetary policy. These indicators commodity price gives, the foreign exchange value of the dollar, and long-term bond yields have a number of advantages as policy guides, especially when they are jointly assessed in conjunction with one another. Recently, these indicators consistently provided reliable signals as to the direction of and to future movements in core general prices. The inflation signals of these indicators were consistent with the actual core inflation that characterized the period. With this, these indicators provided more reliable inflation signals than the above, as described by “gap” models that consistently predicted higher inflation. The point of implementing policy through raising or lowering interest rates is to affect people's and firms' demand for goods and services. Wages and prices will begin to rise at faster rates if monetary policy stimulates aggregate demand enough to push labor and capital markets beyond their long-run capacities. In fact, a monetary policy that persistently attempts to keep short-term real rates low will lead eventually to higher inflation and higher nominal interest rates, with no permanent increases in the growth of output or decreases in unemployment. In the long run, output and employment cannot be set by monetary policy. While there is a trade-off between higher inflation and lower unemployment in the short run, the trade-off disappears in the long run. Policy also affects inflation directly through people's expectations about future inflation. Suppose the Fed eases monetary policy. If consumers and business people figure out, that will mean higher inflation in the future, they'll ask for bigger increases in wages and prices. That in itself will raise inflation without big changes in employment and output. For the most part, the demand for goods and services is not related to the market interest rates quoted in the financial pages of newspapers. Instead, it is related to real interest rates, that is, nominal interest rates minus the expected rate of inflation. As mentioned above: The point of implementing policy through raising or lowering interest rates is to affect people's and firms' demand for goods and services.