The Description of the Federal Reserve and Federal Open Market Committee - Term Paper Example

Question 1The Federal Reserve works to stabilize the money market by ensuring stable price and natural rate of unemployment. Therefore, the employment being above the natural rate, Fed through the Federal Open Market Committee engages in buying and selling bonds and other government securities to increase money in some sector of the economy while selling to minimize money supply in targeted sectors. Moreover, the country has been hit by a financial crisis in 2008, and since then there has been tremendous growth as Fed injected stimulus packages in the financial sector.

For this reason, the action of the Federal Reserve is to observe that the economy is fully out of recession. It has, therefore, maintained inflation target of 2%, but it has been below the targeted value (Board of Governors of the Federal Reserve System).Fed is concerned of the level of inflation in the country. According to FOMC, the increase in the prices of oil has raised inflation and the expected inflation is targeted to be stable in the long run. To ensure that prices are stable, the Fed has to monitor the rate of inflation to minimize the general tendency of price increase.

Question 2The Federal Reserve aims to minimize unemployment by sustaining the current economic growth while maintaining stable prices. It achieves this by mopping out excess money supply when it purchases government securities and bonds. Moreover, Fed believes that unemployment challenges will be addressed by a comprehensive monetary policy. Question 3Federal Reserve targeted a Federal rate of about 0 to 0.25% (Board of Governors of the Federal Reserve System).Question 4Through open market operation, the Federal Reserve controls the buying and selling of securities by adjusting the interest rate.

Increasing interest rate encourages people to buy while lowering discourages people to buy. However, in this scenario the Fed has just used the mouth persuasion that it will buy mortgage based securities and hold to long term treasury securities. In the ideal situation, Fed would have lowered the interest attached to these securities to ensure people sell back to avoid low return on investment. Question 5The Federal Reserve says that it will go on buying agency securities at a rate of $40 billion every month.

This move helps in reducing the money supply from the housing sector to stabilize it after the collapse of the bubble in 2008. Moreover, the Fed aim to increase the grace period by which it holds treasury securities thereby decreases the frequency of injecting money to the economy. Fed also argues for reinventing agency debt along with mortgage securities. These measures Fed says are done to put prevent the rate of interest rising thus helping the mortgage market and financial institutions. Furthermore, Fed also engages in the purchases of the asset to ensure that the operations of securities function in sustaining and maintaining price stability.

ConclusionThe function of Federal Reserve is to apply monetary policy tools to achieve the mandate of stable prices and ensuring unemployment is always at a low level or there is none if possible (Board of Governors of the Federal Reserve System). Work CitedBoard of Governors of the Federal Reserve System. Press Release. Monetary Policy Releases. Web Federal Reserve 30 Oct. 2013. Web. 03 Dec 2013. < http://www.federalreserve.gov/newsevents/press/monetary/20131030a.htm>.