Monetary Policy of the FED during the Economic Crisis - Essay Example

et operations by engaging in aggressive purchase of treasury securities and in December 2008, they extended the operations to the purchase of agency debt and mortgage-backed securities. By the end of 2008, the FED reported to have purchased agency mortgages backed securities worth US $1.25 trillion, and it increased its purchase of agency debt by up to US$ 200 billion. Thirdly, by mid 2009, the FED had purchased long-term treasury securities worth US $300 billion in order to improve the level of liquidity in private credit markets (Brezina, 123-127).

The result of the open market operations is demonstrated in the chart below, which show that increase in the purchase of securities resulted in the increase of cash supply in the U.S economy. Figure: Impact of open market operations Reserve requirement In the writings by Timberlake, he stated that the reserve requirement is a method of credit control that is normally applied by the FED to control the money market by determining the level of cash that is available within the economy (89-95). The reserve requirement draws its basis from the fact that commercial banks keep cash reserves with the FED and then this reserve is maintained for the purpose of liquidity and for providing the means for credit control.

Brezina stated that as a way of responding to the economic crisis between 2007 and 2009, the FED through the reserve requirement policy decreased the minimum reserve ratio that all commercial bank and other financial institutions offering the service of deposit taking keep at the FED’s reserve (198-202). This action was aimed at increasing the power of credit creation by the commercial banks so that the general economy can access more credit and therefore, plunge out of the economic recession.

Discount rate According. This paper presents a comprehensive analysis of the monetary policy of the Federal Reserve System, carried out to mitigate the negative impacts of the financial crisis and to restore the economic growth in the United States. The three monetary policies are discussed and they are deemed effective in ensuring the increase in the circulation of money in the general economy, thereby resolving the liquidity crisis and facilitating more economic activities to continue or kick-start.

One of the key functions of the Federal Reserve Bank (FED) is the regulation of currency or credit in order to reflect the needs of the business community and the general economy and for the purpose of carrying out the broad monetary policy adopted by the U.S government. Monetary policy is the action of a Central Bank, which influences the size and rate of growth of the money supply. The open market operations as the purchase or the sale of securities that include long-term and short-term in the open market by the FED.

The reserve requirement is a method of credit control that is normally applied by the FED to control the money market by determining the level of cash that is available within the economy. The discount rate is the rate at which the FED normally discounts the first class bills or will advance loans to commercial banks. This discount rate affects the cost and availability of credit and in particular, a change in the rate of the discount leads to a corresponding change in the money market rate