Creating your own monetary policy - Research Paper Example

Download file to see previous pages... The discount rate refers to the amount of interest that the Federal Reserve charges to commercial banks and other financial depository institutions for the various loans that they acquire from the discount window of the Federal Reserve. The reserve requirements can also be referred to as the reserve cash ratio. This is a requirement that banking institutions need to deposit a certain amount of money to the Federal Reserve against the various deposits that is made by their respective customers. Open markets operations on the other hand involve the processes of the country’s central bank to sale and buy government bonds in an open market (Orphanides and Volker, 27). The main aim of using this tool as a monetary policy is to manipulate the supply base of money within an economy, and the short term interest rates, for purposes of controlling the nature and level of money supply within an economy. This paper develops a monetary policy that differs from the last policy statement issue by the FOMC. The last policy statement by FOMC was released on 30th of October 2013. Under this policy statement, FOMC denotes that it will continue with its asset purchasing programs. This is because the committee had noted that the policy gained efficiency in improving the economic activities of the United States of America. The committee also has plans to adjust the pace of its asset purchases, but it is still waiting for a report on the levels of progress that the current pace in asset purchasing has an influence in the American economy (Press Releas, 2). According to this policy statement, FOMC made a decision to continue with the purchase of additional mortgages that are backed with securities. This is at a price of $ 40 billion every month. The FOMC also decided to buy long term financial securities at an amount of $ 45 billion every month. Under this policy statement, the FOMC decided to maintain its policies of re-investing principal payments (Press Release, nd. 3). These principal payments emanate from its various holdings of the agency debts and mortgage backed securities. The FOMC also decided to sale matured treasury securities through an auction method. By implementing these policies, the FOMC believes that they would manage to maintain and achieve a down ward pressure on long-term interest rates. The FOMC also believes that they will manage to support the mortgage market, helping to create a broad financial condition that is more accommodative to the various economic and financial interests within an economy. On this note therefore, the FOMC decided to continue with its purchases of mortgage backed securities. This will in turn lead to the growth and development of the economy under consideration. For effective implementation of these policies, the FOMC decided to closely monitor all information concerning the financial and economic development of the country. The monetary policies identified by FOMC do not solve the problem of liquidity. Liquidity is a Macro economics issue that refers to the extent in which a security or an asset can be sold or bought without having an effect on the price of the particular asset. One major characteristic of liquidity is the high number of trading that the asset under consideration attracts. Examples of assets which are highly liquid include securities of money market. During the 2007 credit crunch, it was very difficult for people to access funds such as loans (Orphanides and Volker, 33). Due to the difficulties of accessing credit, then ...Download file to see next pagesRead More