The Federal Reserve System essay

Document Type:Essay

Subject Area:Economics

Document 1

Monetary policy, on the other hand, comprises of decisions as well as actions that are taken by the Federal Reserve to ensure the consistency of money supply in the economy is in line with the growth as well as price objectives. The main objective of the monetary policy is to ensure consistency in the stability of price in the economy. This paper seeks to discuss the history of the Federal Reserve System and its role in conducting monetary policy. Also, the paper will explore how the Federal Reserve utilizes Open Market Operations when conducting monetary policy. History and Description The Federal Reserve System was founded in 1913 by the Congress in order to provide the country with a more flexible, more stable and safer monetary as well as financial system (The Federal Reserve, n.

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d). Typically, FOMC meets up to eight times in a year in Washington. The meeting serves as platforms for discussions of the outlook on the economy and monetary policy of the U. S by the committee. FOMC uses the combined expertise of the Board of Governors and twelve Reserve Banks. Critical Analysis of Open Market Operations After the financial crisis that occurred between 2008 and 2009, the Central Bank of America has been utilizing the Open Market Operations to manipulate the short-term interest rates by maximizing or minimizing money supply (Axilrod, 1996). The Central bank reduces the supply of money by selling the short-term securities on its balance sheet. On another hand, the Central bank maximizes the supply of money by buying the short-term paper as well as loading assets on its balance sheets.

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Benefits of Open Market Operations to the US economy The actions of monetary policy may influence employment, output, and prices through different complex channels. Such channels may comprise different forces in financial markets which result in changes in the cost as well as the availability of money to households and business, the net worth of household assets and the value of the dollar in foreign exchange with direct impacts for the prices of imports and exports (Axilrod, 1996). In order to have a large-scale as well as a successful open market operation, there must be a broad, firm and active securities market (Lee, 1983). Therefore, the unavailability of such a market may render an open market policy to be ineffective. In addition, there may be contradictions between an open market operation and the bank rate.

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Selling of securities by the Federal Reserve may prove unsuccessful in limiting the bank's loanable resources provided that an opportunity of rediscounting leaves a chance of replenishing the bank reserve like before. Furthermore, open market operations may result in restricted dealings. S than Lee (1983). The article emphasizes on the effectiveness of open market operations in allowing most central banks enough flexibility in the timing, as well as the volume of monetary operations using their own creativity, facilitate businesslike and impersonal relationships with participants within the marketplace. As well, the article explains that open market operations serve as a path of preventing disorganizations of direct controls. The article further explains about the importance of developing indirect controls in the course of economic development because, with the expansion of the nation's market, direct controls seem to turn out to be less effective as the markets soon find a way around them, particularly in the world's economy.

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