Working with Federal Reserve's Publications - Assignment Example

? Working with Federal Reserve’s Publications Working with Federal Reserve’s Publications Introduction Over a year and a half, world economy has experienced a hard blow. There is a general collapse of global credit boom, which was initiated by the ending of housing boom in the United States and other countries. This has led to deterioration of asset values and credit conditions. These conditions have taken a heavy toll on business and consumer confidence (Bernanke, 2009) The Federal Reserve’s Bank is a bank in the U.S.A, run by board of governors who oversee and have an influence on interest rates through the monetary policy. Federal Reserve’s Assessment of the Current Economic Activity and Financial Markets and their View on Inflation The financial crisis is on the rise worldwide. Prices of commodities in the markets are shooting up and the consumers are finding it difficult to survive in these harsh financial situations. The financial organization, firms and industries are finding it unbearable to hold on to the competition. In the United States for instance, Fannie Mac and Freddie Mac which are government parastatals were put under receivership. Lehman brothers’ holdings and other large business institutions were either at the verge of collapsing or they actually did collapse. Others were acquired by their competitors under unavoidable circumstances of bankruptcy. Large withdrawals of money were made by stakeholders and investors which affected the money market mutual funds. This undermined the stability of short term funding markets and the bank wholesale funding markets. The strain on financial markets has also caused economic activities to decrease. The GDP was reported to have gone down at an annual rate of 6.2 percent in the last quarter of the previous year though recent indicators show some slight improvements. The rate of unemployment moved 7.6 percent .Reacting to deterioration of job markets, loss of equity, housing wealth and tightening of credit conditions, families cut on their spending habits. Buying of homes and construction of new ones are not doing well at all despite the fact that mortgage rates have gone extremely down. This reflects how our economy is uncertain and home prices are likely to fall even lower. Manufacturing sectors have also deteriorated in their output bringing its rate of capacity utilization very low. The weak economy has led to many premises cutting their capital expenditures. Businesses have done their best to reduce the number of investors. Sales will remain poor for some time and the cut down on production is to be evident in the coming months. This was a threat to international economic stability. This projected a devastating financial collapse globally. The treasury saved the situation by injecting 250 billion dollars in to the U.S.A. financial organization. Monetary Policy Tools The Federal Reserve Uses To Stabilize The Economy And Maintain Price Stability.  Late last year, Federal Reserve responded aggressively to the deterioration of financial markets. This was evident in the way they continued to ease monetary policy. The Federal Open Market Committee brought its fund rates at a very low rate of 1/4 percent where it has remained to date. Making the federal funds rates almost zero, the Federal Reserve is focused on other ways in which it can ease tough conditions at the credit markets. They have new facilities and have expanded existing facilities to facilitate the flow of credit services to its customers. (Monetary Policy And The Economy),notes that lower interest rates in the United States will lead to decline in the exchange value of the dollar and prompt an increase in price of imports and decline in the price of exports. Auction facility was also increased so that banks could obtain the funds they needed to serve their credit customers better. The FOMC also expanded its network swapping lines with foreign central banks to help in solving the global financial crisis which was now getting into the funding markets of the U.S.A. TALF was introduced which was designed to help in the renewal of assurance of consumer and small business asset backed securities. The Federal Reserve has continued to purchase large agency debts and their mortgages so as to help in the functioning of mortgages and housing markets. These measures taken by the Federal Reserve, U.S.A. entities and other foreign governments have helped in stabilizing some financial markets. Inflation has decreased notably and strains in these financial organization eased .Commercial market conditions have improved and even lowered rates. The intense outflows of money have been replaced by a smooth inflow of cash. Since the purchasing of agency debt and mortgages by the federal reserve interest rates have fallen up to 1 percent though there is an eased up situation in the financial markets, most institutions like the security remain under pressure or are still closed up. Consumer prices have been put on check probably because of the considerable drop in power prices. Although the economy seems weak now, a number of factors will be put in place to check the economy back to where it was with low and stable inflations. The government, Federal Reserve and the Treasury have taken action to restoring stability in the global economy. Improvement in financial conditions will mean the economy will be well supported by fiscal and monetary stimulus, low prices of power supply, business investors and readily available credit. Fiscal policy was passed by the congress. This policy is aimed at empowering economic activities. This package includes (Bernanke, 2009) -personal tax cuts and increase in transfer payments that will stimulate house hold spending -incentives for business -federal grants for state and local governments stop them from reducing their services or council building projects and also increase the federal purchases. The fiscal supports the public and private spending which boosts spending, demand and production in the next couple of years and will regulate on loss of employment and income that will result from unemployment. The fiscal policy has its uncertainties in the macro economy on the matters of timing and magnitude. The Federal Reserve is responsible for the nation’s monetary policy. It looks after problems like unemployment, it stabilizes prices in the market and it also moderates long term interest rates. The Federal Reserve act spells clearly the goals of monetary policy Stabilization of market prices means products, services raw materials and labor are stable and this contributes to higher standards of living. Price stability also promotes saving and creation of capital and need to guard against losses are reduced. Households tend to save and businesses invest more. (Monetary Policy and the Economy) has stated that, when the economy slows and there is a high rate of unemployment these policy makers are made to ease monetary policy to stimulate demand as explained above. When demand is boosted, loosening of the economy will be absorbed and we will be able to curb up the problem of unemployment. If the economy is showing signs of overheating and inflation pressures are building, the Federal Reserve will be inclined to counter these pressures by tightening the monetary policy. (Monetary Policy And The Economy). The government influences the economy on the demand side through changes in taxes the way the nation spends. Economic Outlook for the Next Twelve to Eighteen Months (Johnson, 2010), with the efforts that are being put in by the governments globally on the collapsing economy, there is going to be a quick recovery in global economy. This recovery is not going to be felt everywhere though, because in the weaker euro zone countries like in the third world countries, pressure from financial markets will not be an exception as they already have huge debts to clear. Even though the economy is going to improve, there is always going to be the problem of unemployment especially in the U.S.A. Large firms will do well and marketing opportunities will expand to other countries like China, and India where most people will be hired. Smaller firms will have harder times in borrowing capital as lending standards are being tightened though interest rates will remain low for households and firms. Normalizing of the monetary and fiscal policy which is very weak in the United States will see the slowing down of the economy growth .For developing countries like china and India is a proof of success in the next few years. Conclusion There might be a possibility of the world globally needing time to deal with this financial instability unlike the time we have given it eighteen months and in two years time. Remember that we are dealing with a policy and policy makers relied on the projections of the future using the information at hand. With different economic indicators the government can project where the economy is headed to. Adjustments should be made where it did not do so well so that the economy of the world can pick up and start growing positively again. References Bernanke, B. S. (2009, March 3rd). Board of governors of the federal reserve system. Current economic and financial conditions and the federal budget . Johnson, S. (2010, july). U.S. economic outlook. Retrieved november 29th, 2011, from http://www.iie.com/publications/testimony/print.cfm?researchid=1758&doc=pub. Manufacturing barometer. (2011). Retrieved November 29, 2011, from http://download.pwc.com/ie/pubs/2011_manufacturing_barometer_1q_2011.pdf. Monetary policy and the economy. (n.d.). Retrieved November 25th, 2011, from http://www.federalreserve.gov/pf/pdf/pf_2.pdf. Pearson, G., Wilton, P., & Woodman, P. (2011, October). Economic outlook. Retrieved November 29, 2011, from http://www.slideshare.net/cmi_managers/cmi-economic-outlook-2011. Read More