Federal Reserves Policy. Past, Present and Perspectives - Coursework Example

Introduction This paper addresses the topic of Federal Reserve’s Policy by overlooking its past and current policy and finally, drawing some perspectives on its future course of actions. The main concepts which will be discussed are roles and objectives, tools, implications in the financial crisis, measures taken and future considerations. Roles and objectives of Fed The Federal Reserve has the following key roles in the economy. Firstly, it is the regulator of the banking system and has as the primary goal the health of this system. In order to fulfill its objective, Fed is a monitor of the financial condition of banks that operate in the United States, and also it facilitates interbank transactions and operations. Secondly, the central bank is the sole supplier of currency, and the money supplied is considered legal tender by law. Although, in the past the money supplied was backed by gold or other metals, nowadays the value of money is given by the purchasing power of it. Furthermore, Fed is the holder of nation’s gold and foreign exchange reserves. Another role is to act as a bank’s bank, which means providing lending to banks from the banking system. Highly connected with this role is the lender of last resort role i.e. Fed can save banks which are in financial distress, in order to maintain the stability of the overall system (Mankiw 330). More about this role it will be discussed later in the paper when considering the financial crisis, and the measures taken by Fed. Also, the Fed role as a central bank is to supervise the payments system in order to ensure smooth operations of domestically and international clearing system. Moreover, Fed is responsible to conduct the monetary policy by considering the quantity of money available in the economy i.e. money supply. Most specifically, the monetary policy monetary policy falls under the responsibility of the Federal Open Market Committee (FOMC), which also has the role to consider changes in the money supply. The Fed publishes two monetary aggregates M1 and M2, which are a measure of different types of liquidity. The monetary aggregate M1 measure the most liquid form of money and includes currency, traveler’s checks, demand deposits and check deposits (Kohn 134). The monetary aggregate M2 is formed from M1, savings accounts, time deposits with amounts under $ 1000,000, as well as balances in money market mutual funds. Figure no. 1 Evolution of M2, 2007-2011 Source: Federal Reserve System, H6-Money stock measures. The figure no. 1 depicts the important increase in the monetary aggregates M1 and M2 for the period analyzed. The monetary aggregate M1 has increased from 1367, 8 billion USD in January 2007 to 1853, 2 billion USD in January 2011. Considering the evolution of the monetary aggregate M2, this has increased in 2008 (9, 5% compared to 2007), and it was determined by the Fed’s quantitative easing policy , which will be discussed later in the paper. This was the biggest annually increase from 2001, and it was brought by the intensification of the banking crisis. Figure no. 2 Evolution of M2, 2007-2011 Source: Federal Reserve System, H6-Money stock measures. Considering the period of the financial crisis, from the components of the monetary aggregate M2, savings accounts registered the higher values for the period analyzed, and an increasing trend from 3872, 6 billion USD in 2007 at 5500 billion USD in 2011. Considering the certificates of deposit ( Read More