Recent Direction of Monetary Policy in a Country of Your Choice - Essay Example

? Define Monetary Policy, and Discuss the Recent Direction of Monetary Policy in a Country of Your Choice Introduction The conception of monetary policy is commonly regarded as fiscal strategies or guiding principles which are implemented portraying the means and the techniques of money supply in a particular economy. Presently, the Reserve Bank executes the functions of the monetary policies in the USA for the purpose of controlling significant issues such as inflation, unemployment, and investment trends among others (Mankiw, 1997). Notably, there lie several purposes of the monetary policies that have been transformed periodically. The various guidelines of the government of a particular country possessed a noteworthy role in the economy in which the central bank acts for the purpose of executing the monetary or fiscal policies to a large extent. The chief motives of executing the monetary policies are to enhance the progression as well as the advancement of a country, decreasing the rate of unemployment and maintaining stable prices of different commodities (Reserve Bank of New Zealand, 2007). Monetary or fiscal policies are often related with certain important factors including the facilities of credit and the rate of interests among others. It can be stated that the monetary guiding principles establish a kind of interrelation amid the rate of the interest charges which indicates toward the price or charge at which money can be borrowed and also toward the overall money supply in an economy (Taylor, 2001). In this paper, a brief idea regarding the conception of monetary policy along with its recent direction prevailing in an economy is taken into concern. In this regards, this paper will focus on presenting a brief overview of monetary policies prevailing in USA specifying its recent direction. A Brief Overview of Monetary Policies in USA Monetary policy of any nation is defined as the management of money supply and interest charges that are executed by the central banks of various countries to control the rising commodity prices as well as to diminish the rate of unemployment to a certain extent. From an in-depth point of view, it can be inferred that the monetary policies have a considerable impact upon the demand in an economy which in turn tend to affect the rate of interest charges (Patnaik, 2007). It is in this context that the substantial increase in the rate of interests makes the finance lending abilities of an individual more costly where the organizations as well as the firms hold fewer inventories. Moreover, a rise in the interest charges also influences the investment initiatives of an individual as well as of any industry participant to be more costly. Subsequently, the assets tend to lose its real value (Floyd, 2010). Furthermore, in relation to the financial reforms considered in the USA, the role and the importance of the monetary policies have posed greater attention as a major economic growth driver. Notably, the adequate functioning of the monetary policies is to sustain a stable and low inflation rate in the economy. The significances as well as the purposes of the monetary policies have increasingly become the prime importance of the policy makers in the USA for the purpose of introducing certain policies that would support to maintain a stable and low inflation rate (Friedman, 1968). The broad aims or targets of the monetary policies are to attain rapid rate of financial progression and advancement of the economy, making sure to preserve the stability of price into the economy. It also aims at generating more employment prospects and promoting distributive integrity towards the economy (Rangarajan, 1997). The issue of stability of prices, a low and a steady price situation among others are also fundamentally regarded as a necessary element for the purpose of enhancing as well as raising the productivity and growth of an economy (Rangarajan, 1997). Moreover, the other purposes of the monetary policies include stabilizing the rate of interests, dealing with the critical situations related to the deficit in the current account and raising Gross Domestic Product (GDP) rate of a particular economy (Cecchetti, 2000). The issue of inflation is often regarded to portray the increment in the commodity prices within the economy which signifies that the money is steadily losing its value which can be effectively controlled by the implementation of competent monetary policies. The main underlying cause of inflation is the shortage of supply which influences the sellers or rather forces them to increase their prices generating inequality between demand trends and supply trends (Hudson, 1983). Recent Directions of Monetary Policies in USA The revival of the worldwide economy is continuously progressing with significant growth rate in output in the developing countries. However, it was observed to make weaker financial performances in the developed countries to a certain extent during the similar time-period. Taking into concern the world financial situations and updates; the inflation rates were raised through a considerable increase, particularly in the food as well as energy prices. As a result, the monetary policies have been tightened in many developing and developed nations to overcome the various issues caused due to inflation (United Nations, 2011). In this regards, the occurrences of various natural calamities including earthquake, nuclear disaster and tsunami that took place in Japan also accounted for generating crucial disturbances in the worldwide monetary markets which in turn also affected the USA (Oxford Business Group, 2012). Thus, it can be stated that the higher food prices as well as the energy prices ultimately pushed up the issue of inflation globally. Due to this particular reason of constantly increasing basic commodity prices such as food and energy, in most developed economies such as USA the monetary authorities focused on tightening the already implemented as well as planned monetary policies. Furthermore, considering the aspect of monetary policies, many developing countries attempted to make deliberate efforts by increasing the interest charges in order to cope up with the rising pressures of inflation (United Nations, 2011). Along with the issue of inflation, even though the condition relating with the labor market has generally enhanced, the labor market continues to be a cause for concern in the USA. In this regards, Bernanke (2011) noted that the total quantity of people, who are unemployed for a period of six months or no longer persist to participate in the short-term employment in the developed countries, ultimately generate certain difficulties in relation to monetary policies. It is in this context that the already employed population is observed to gradually lose their productivity. As a result, the increased employment rate ultimately posed a critical issue within the worldwide economic market affecting the USA as a developed nation to a large extent (Bernanke, 2011). Another significant factor regarding the strict execution of monetary policies in the USA is the weakening of the value of Dollar. Especially, the Dollar has continued to be a crucial factor for downward trend as compared with other currencies. The exchange rate of dollar or Euro was recorded to be 1.38 in the year 2011 and 1.28 in the year 2012. In contrast with Japan, it has been observed that the currency of Japan (i.e. Yen) has largely fluctuated around a peak of about 82 Yen per Dollar since late 2010 (Bernanke, 2011). The growth of GDP for the year 2011 and 2012 of United States has been estimated at 2.6 percent and 2.8 percent respectively along with fall in the unemployment rate to 8.2 percent in the year 2012. From this assessment, it can be well observed that the net exports of United States in lieu with its monetary policies posed a considerable effect upon the economic advancement and development of the country (Bernanke, 2011). There lie various potential risks for United States in the context of the monetary policies as well as in the nature of the international worldwide monetary market. The various potential risks for United States include high peaks in the oil prices, considerable risks upon the public finances and a steady weakness in the monetary sector and housing market (Bernanke, 2011). In this connection, the various uncertainties and the risks that are likely to be considered during the year 2011 and 2012, especially for United States, include the major outcomes generating from the sustainability of the public finances and the susceptibility of the private monetary sector. Moreover, the other uncertainties and risks witnessed by United States in its recent trend of monetary development include the constant rise of commodity charges and collapse of the Dollar (United Nations, 2011). In addition, from the viewpoint of the direction of the monetary policies in United States, there lies the issue of fiscal severity and absolute debt stress. In terms of fiscal severity and absolute debt stress that prevails in United States, it has been recognized that the fiscal severity is likely to decrease the budget discrepancies to 4.4 percent in the year 2011 and are also expected to broaden further. It has been noted in a report published by United Nations’ Department of Economic and Social Affairs (DESA) and other governing bodies of United Nations (2011) that the factor of rising prices of housing along with broad range of foreclosures continuously affected the economy of United States. The huge external debt arrangement and the global imbalances regarding the trade deficits have kept enormous pressure upon the Dollar of United States. The GDP of United States is expected to fall below 4 percent in the year 2012 which in turn would significantly affect upon the economy as well as into the worldwide monetary market of United States to a certain extent. Hence, the expected fall of GDP in United States might pave the way for the issue of inflation along with the unemployment rate (United Nations, 2011). In order to balance and to make sustainable conditions into the worldwide monetary market along with managing the various uncertainties, the baseline outlook for the year 2011 and 2012 depicts certain policy directions which can also be followed by United States. The policy directions in response to various challenges, uncertainties and risks include that the developed countries such as United States should be very much cautious regarding the fiscal severity and prevailing high degrees of unemployment. Moreover, the policy directions also include consolidation of certain plans and strategies which mainly focuses upon the sustainability of the public debt and exchange rate policies. In addition, the policy directions in USA consider that the monetary policy should redesign the fiscal policies for the purpose to strengthen, to promote and to make sustainable financial advancements and progressions within the economy (King, Gans, Stonecash & Mankiw, 2011). There are certain factors that have explicitly reflected upon the approach as well as the monetary strategies for the year 2011-2012. The factors include the worldwide commodity charges, emergence of the issue of inflation, regional imbalances and inequalities between supply and demand among others. By considering the aspect of the direction of the monetary policies in United States, certain facts were observed that crucially relates with the aspect of monetary policies (Subbarao, 2011). For instance, the fact regarding the GDP is one of the critical influencing factors that relates with the aspect of monetary policies and its efficiencies to a large extent. According to Subbarao (2011), the development of GDP in the United States which was quite strong that amounted to 3.1 percent in the year 2010. This in turn eventually pushed back to 1.8 percent which made major fall in the spending power of the government as well as led to the deceleration in private consumption and ultimate rise in imports (Subbarao, 2011). Subbarao (2011) further observed that the housing markets of the United Sates remained weak during the year 2010-2011. The rate of unemployment continued to dominate into the market of United States and was rising significantly. Most importantly, the increment of the commodity prices have endangered the monetary market of United States and possessed downside risks towards the advancement and progression of the country (Subbarao, 2011). Noticeably, the prices of ‘Brent Crude’ which is a major trading classification of crude oil in United States increased substantially from an average of US$ 75 per container during the year 2010 to US$ 123 a container by the month of April in the year 2011. Along with the increase in the crude oil prices in USA, the international prices relating with food also increased considerably (Subbarao, 2011). Hence, it can be stated that the various aspects such as the increased unemployment rates along with food prices and the weakening housing markets of Unites States ultimately raised a valuable concern for designing effective monetary policies within the economy. According to the observation made by The Food and Agriculture Organization (FAO), the charges of the international food were raised by 37 percent in the year 2011. Hence, the increment, particularly in the commodity charges had posed a considerable affect upon the economy of United States (Subbarao, 2011). In relation with the direction of the monetary policies, the Federal Reserve System is viewed as the major regulatory organization in the monetary arrangement of United States. The Federal Reserve System of the United States generally emphasizes upon the worldwide economic functions controlling the money circulation. It is worth mentioning that the chief feature of the monetary policy of Federal Reserve System is to adjust the important aspect of money circulation (Schmidt, Shelley, Bardes & Ford, 2011). In terms of the aspect of circulation of money, the US Federal Reserve System signifies that they have increased the interest rates charged by banking institutions while borrowing the money. It can be further observed that if the Federal Reserve System of the United States initializes loose monetary policy which is often termed as an expansionary policy, the facilities of credit supply is quite likely to increase significantly along with decrease in the expenditures within the economy. Simultaneously, if Federal Reserve System of United States initializes a tight monetary policy which is often termed as contractionary policy, the facilities of credit supply ultimately decrease, contradictorily increasing the expenditures within the economy. For the motive of raising and encouraging the economic or monetary progression and advancement of United States, a loose monetary policy is generally executed to a certain extent (Schmidt, Shelley, Bardes & Ford, 2011). Thus, it can be stated that the ultimate purpose of the Federal Reserve System of the United States is to control the vital issue of inflation and to deal with various risks and uncertainties that generate within the economy of United States. Conclusion After acquiring a broad idea regarding the conception of monetary policies, it can be inferred that there lies a considerable effect of monetary policies upon the monetary market and also into the economy of United States. There lie various important purposes or objectives for introducing the monetary policies such as for making sustainable advancement of a country and also to deal with severe situations such as economic or monetary crises, inflation and the unemployment rates among others. In the paper, recent direction of monetary policy of United States of America has been discussed. The role and the importance of the monetary agency that prevails in the Federal Reserve System of United States have been traced out. It depicted certain strategies as monetary policies in order to manage various risks and uncertainties that are faced by the United States. Thus, it can be said that in terms of the monetary policy, the Federal Reserve System of United States plays a noteworthy role in the economy and also in the global monetary market. References Bernanke, B. (2011). Monetary policy report to the congress. US: Diane Publishing. Cecchetti, S. G. (2000). Making monetary policy: objectives and rules. 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