The federal reserve - Essay Example

Close co-ordination between the Federal Reserve and the Government of the USA is essential, because monetary policies should be in sync with fiscal policies for an effective and sustainable economic growth in the long run. The steps taken by the Federal Reserve, for example by increasing the interest rates to reduce inflation will have an impact on industrial production, consequently on employment. Therefore regulating interest rates in an economy by the Federal Reserve is a balancing act which takes into account several factors after analyzing the economic indicators.

The Federal Reserve has an option of regulating money supply in the economy to regulate growth. Providing liquidity into the economic system by regulating money supply has its impacts on financial markets. Handa (2009, p. 429) observed “Many central banks, especially in financially developed economies, nowadays choose to use the interest rate, rather than the money supply, as the primary monetary policy instrument, while leaving the money supply endogenous to the economy.” Any change in the federal fund rate has cascading effect on short-term and long-term interest rates, foreign exchange of USD and stock prices.

The cumulative effect of these impacts reflects in demand patterns and eventually spending by the businesses. In an economic slowdown, if the situation remains unchecked the multiplier effect caused in this process might lead to recession in the economy. Therefore, the role played by Federal Reserve in stabilizing economy through its monetary policies is very significant. Since policies of the Federal Reserve are concerned with employment, inflation and output, the economic indicators which are relevant in this regard are required to be carefully analyzed by the Federal Bank.

Several economic indicators relating to employment, inflation and output or growth are used for this purpose. Analysis of the National Employment Report will be useful in assessing the