Current Event: Economic Concepts - Essay Example

Monetary policy and the Federal Reserve Summary The Federal Reserve has the responsibility of setting monetary policy. However, congress retains oversight responsibilities to ensure that the Federal Reserve keeps to its mandate. The Federal Reserve being the nation’s central bank has responsibilities in four main categories: provision of emergency liquidity, supervision of banks and other financial firms for safety and soundness, provision of payment services systems to the government and other financial institutions and monetary policy (Labonte, 2014).

The federal reserves monetary policy function is a very vital function of this financial structure. The Feds define monetary policy as actions that it partakes to influence the access and cost of money to fulfills the goals set up by Congress, a suitable price level and suitable work. A wider classification of monetary policy would include policies, statements, directives, and forecasts of the economy (Gagnon, 2010).During the 2007/2008 financial crisis, the federal bank took on some measures as concerning its monetary policies to try and salvage the situation.

The Feds sought to target the federal funds rate. In December of 2008, the Feds brought down the federal funds rate to a range of between 0 to 0.25% also called the zero lower bound. The Fed could not provide at that time any more stimulus by the use of conventional policies. So the Feds turned to unconventional policies to further provide stimulus to the economy. It has made a promise to keep the Federal funds target low for as long as unemployment is above 6.5% and inflation is low (Labonte, 2012).

The Feds also attempted to stimulate the economy through several rounds of asset purchases of Treasury securities and those securities issued by government sponsored enterprises. Since September 2012, the Feds have made large purchases of mortgage-backed securities and Treasury securities. However, unlike the two previous rounds of asset purchases, this time the Feds offers no specific date when it ends these purchases instead pledging to continue acquiring until the labor markets improve. In December of 2013, the Fed announced that it would begin tapering off those purchases.

Going by the current course of the financial situation, this may be seen as the first step towards ending of the unconventional monetary policy (Labonte, 2014).Monetary policy changes have effects both in the long term and the short term. In the short term, when all other factors remain the same, an expansionary monetary policy that reduces interest rates will increase interest-sensitive spending. Interest-sensitive spending includes physical investments, residential investment and consumer spending.

To reduce spending, the Fed raises interest rates and to increase spending, they will reduce the interest rates. Money and credit induced demand have an effect on the U.S. GDP growth and total employment (Lombra, 1980).Although monetary policies can be effective in the short term, many economies have an elaborate system of contracts in the short term that make it difficult for adjustments in wages and prices to take place in response to more rapid growth of money and credit. Further, expectations are slow to adjust to the longer-run consequences of major shifts in monetary policies.

These slow adjustments lead to rigidities in prices and wages. Because of these rigidities, changes the growth of money and credit may have a large effect on output and employment but with a policy backlog of six to eight quarters before the wider economy catches up to the monetary policy measures. Thus, monetary policy matters in the short term by will be neutral for the GDP growth and employment in the long run. ReferencesLombra, R., & Moran, M. (1980, December). Policy advising and policymaking at the Federal Reserve.

In Carnegie-Rochester Conference Series on Public Policy (Vol. 13, pp. 9-68). North-Holland.Labonte, M. (2014). Monetary policy and the federal reserve. Current policy and conditions. Congressional research service.WashingtonGagnon, J., Raskin, M., Remache, J., & Sack, B. (2010). Large-scale asset purchases by the Federal Reserve: did they work? (No. 441). Staff Report, Federal Reserve Bank of New York.