Us_Federal_Reserve_Monetary_Policy

US FEDERAL RESERVE MONETARY POLICY The only way to truly define money is in the framework of a vibrant economy where markets and other institutions exist in a society where there are laws and sutoms. Money is a network that is used for goods and services. Key economic properties of money are: a means of payment, a store of value, and a numeraire. There are several physical properties of money. Transportability, durability, and cognizability are just a few. The basic control means of any society is the ability to control the money and manipulate the money rate of interest. However, money does not provide a steady standard of measure. It is flexible, simple, and a varying store of value. The conditions required to guarantee that a unit of money is the same value in each period are hardly ever encountered. Money does not uphold a exact value throughout time, but permits prices to change in a flexible manner. The central bank uses a monetary policy as a tool to manage money, credit, and interest rates. The US Federal System, The Bank of Japan, and the Bank of England all comprise the central bank system. A central bank provides a range of services to commercial banks. The central bank holds deposit accounts and operates a system for inter-bank payments that enables commercial banks to transfer balances in these accounts to one another (reference). The central bank provides loans to commercial banks during times of crisis. In short, the central bank is the accountant for the government. When the government wants to make or receive a payment it needs a bank just like the rest of us (reference). In order to do this, the government gives the central bank permission to print money. This makes the central bank very unique. If the central bank wants to make a purchase, it simply creates the means to do so. The central bank can also expand the size of its balance sheet at will. When a central bank increases its assets, it is matched by an increase in commercial bank liabilities. During financial crisis, the central bank provides loans to banks that are illiquid but still in the black. There are certain restraints on the central bank. It cannot control the total quantity of money and credit in the economy directly. The central bank is a fundamental part of the financial policy in the United States. Central bankers adjust interest rates to reduce the economic and financial systems by pursuing the following objectives: low and stable inflation, high and stable real growth, and stable financial markets (reference). The justification for keeping the economy inflation free is clear-cut. Maintaining price stability enhances money’s usefulness as a unit of account and as a store of value (reference). Prices are fundamental to everything that happens in a market-based economy. This is the foundation of supply and demand. Central bankers work to reduce the fluctuations of the business cycle. When recessions occur, like the one we are in now, consumers spend less which causes businesses to layoff employees. When recessions occur, peole lose faith in banks and rush to low risk alternatives. This causes the flow of resources from savers to borrowers to stop (reverence). In today’s economy this means that it is difficult to obtain any type of loan. To succeed a bank must have policies. These include: independent of political pressure, accountable to the public, transparent in its policy actions,. And clear in its communications with financial market and the public (reference). In my opinion, independence is the most important policy. The way our current economic system is comprised, the decisions we make today will not only effect us in the near future but also in the years to come. Therefore, politicians are encouraged to do everything they can for their constituents before the next election. This includes manipulating interest rates to bring short-term wealth at the expense of long term stability (reference). Politicians attempt to achieve this goal by keeping interest rates low, which raises employment as well as spending. This results in inflation later. Because of this, governments have moved responsibility for monetary policy into a separate institution (reference). The government gives central banks control over budgets and decision making. In conclusion, these policies affect monetary policies on the economy’s production and employment. In the early twenty-first century one in six countries in the world are experiencing inflation. By 2005, five in six countries were growing at a rate in excess of two percent per year. Not only has inflation been lower and output higher, both inflation nad output appear to be more stable (reference). Monetary policy is a likely source of low, stable inflation and high, stable growth (reference). Central bankers’ success can be traced to their ability to control interest rates. This requires that banks and individuals actually demand central bank liabilities. The central bank operates an interbank payments system based on reserves. It does this to ensure that banks can continue to make payments, and to ensure that commercial banks use their paments system. As long as banks want reserves, there will be a monetary policy (reference).