Federal Reserve Essay
Secondly, the Fed supervises and regulates the other commercial banks and other financial institutions to ensure reliability and security of the country's financial and customer's credit rights. Thirdly, the Federal Reserve maintains the financial system stability contains any systematic risk that may arise from the money markets. Finally, it provides certain financial services to the US government and financial institution and overseeing and operating the country’s payment systems (Campbell et al. The Role of Federal Reserve in Stabilizing the Current Economy The Fed uses the interest rate as a monetary policy tool. When there is increased the money supply in the economy, and the Fed feels that the economy is growing too quickly, it increases the interest rate making credit unavailable to the consumers and businesses thus slowing down the economy (Campbell et al.
Economic Indicators that Fed Should Analyze Everybody in the country looks up to the Fed for guidance on the performance of the economy and what is to be expected in future. Economic indicators are crucial to the Fed as they provide reliable information that helps the Fed in analyzing as well as predicting the country’s economic performance. They comprise of various indices such as stock market prices, inflation rates, money supply changes, unemployment rate, and the business cycle. If a couple of economic indicators suggest that the economy will be better or worse than anticipated, the Fed may decide to apply the monetary policy tools in ensuring that the economy is stable. The information on employment and unemployment is crucial in determining the direction of the economy.
Similarly, the policymakers are usually concerned about the growth of the manufacturing sector. When the manufacturing sector has recorded a high growth as reported by the business leaders, this is an indication of a healthy economy. The retail spending or the consumer purchasing power is another factor that the Fed consider while determining the health of the economy. It reflects the ability of the people to purchase goods and services thus indicating the strength of the economy (Baker, Bloom & Davis, 2016). Besides, the percentage of household spending or the amount of money people spend on goods and services relative to their income shows how well the economy is performing. On the other hand, if the Fed sets a discount rate that is lower than the prevailing market interest rate, commercial banks are encouraged to borrow from the Fed since it is cheap (Ihrig, Meade & Weinbach, 2015).
That way, the banks will hold less excess reserve which allows great multiple expansion of deposits and increases the supply of money to the economy (Bruno & Shin, 2015). The Fed may purchase or sell the US government bond to increase or decrease the supply of money in the economy and thus stabilize the economy. When the Fed buys government bonds, it increases the reserves for the banking sector which in turn increases the level of money supply to the economy through the multiple deposit expansion process (Reifschneider, Wascher & Wilcox, 2015). On the other hand, selling off the government bonds by the Fed reduces the supply of money. The Effects of Federal Reserve Actions on Aggregate Demand and Supply The monetary policy has an impact on the aggregate demand and aggregate supply in the economy.
The Fed can use contractionary or expansionary monetary policies to regulate the money supply in the economy. As shown in the graph below, both contractionary and expansionary money policies have an impact on the aggregate demand and aggregate supply. Figure 1 If the Federal Reserve decides to increase the money supply, then everyone will be willing and able to buy goods and services thus increasing the aggregate demand and decreasing the aggregate supply (Reifschneider, Wascher & Wilcox, 2015). As a result, the prices of commodities will go up. , & Davis, S. J. Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593-1636. Bruno, V. , & Justiniano, A. Macroeconomic effects of Federal Reserve forward guidance. Brookings Papers on Economic Activity, 2012(1), 1-80. Ihrig, J. E. The Journal of Applied Business and Economics, 17(3), 92.
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