Macroeconomic Policies Used by the Federal Reserve - Essay Example

Macroeconomic Policies Used by the Federal Reserve The Federal Reserve’s conventional financial strategy tool in early 2009 was in a least effective leap because the American financial system was at the helm of monetary disaster due to the financial recession (Bauer & Rudebusch, 2014, p. 233). As a result of the recession, the federal government’s selected committee resulted to ensuring two unconventional policies are adopted. One policy is the quantitative easing of programs and the other policy is the forwarding learning and explicit guidance for the path of future rates of federal funds. These unconventional policies provided an additional financial policy accommodation towards the end of recession and the ultimate strengthening of the economic recovery (D’Amico & King, 2013, p. 426). The alternative strategy actions that were set up intended to put more pressure towards the long term interest rate achievement and to ensure that the overall monetary conditions of the country become improved. This includes bolstering the prices for residential properties and corporate equities (Kashyap & Stein, 2012, p. 266). The Federal Reserve’s adoption of the open market operations involves buying of existing treasury securities by the Federal Reserve in the secondary market (Bauer & Rudebusch, 2014, p. 234). The secondary markets are securities that have already been obtained and sold off to private investors. When buying the securities, the Federal Reserve ensures it does so but under the equivalence of an existing currency. This expands the Federal Reserve’s base and at the same time increases the ability of depository financial institutions to provide loans as well as expand their existing credit facilities (Bauer & Rudebusch, 2014, p. 234). Normal open market operations involve functions are typically carried out through repurchasing agreements (D’Amico & King, 2013, p. 426). If the Federal Reserve wishes to remove liquidity or add the same liquidity during the normalization period, then it enters into reverse repos or repos respectively. Repos, also known as repurchase agreements are contracts signed between two or more parties to purchase securities and then repurchase the same securities at a future date and price (D’Amico & King, 2013, p. 425). Repos are considered as an economic equivalent to a collateralized loan. Differences between the first and second transactions determine the interest rates accrued on the loan (Bauer & Rudebusch, 2014, p. 235). The American Open Market Committee, which is also referred to as the FOMC provided financial guidance to aid in the future path to be undertaken regarding federal money (D’Amico & King, 2013, p. 426). Initial advice guided the Federal Reserve regarding the condition, which weakened the economy and most of which are likely to warrant low levels of the central government’s fund for a period of time (Bauer & Rudebusch, 2014, p. 235). Recently, FOMC has shifted from the calendar based system of guidance and has come up with a more contingent approach (D’Amico & King, 2013, p. 427). This approach meant keeping the funds from the Federal Reserve at a low and effective bound until issues of unemployment in the country becomes handled. The national inflation rate between the first and second year should not exceed the committee’s 2 percent long term goal of inflation. The guidance offered by the Federal market committee together with the quantitative easing programs intended at helping support further economic activities as well as check for unwanted disinflation pressures (D’Amico & King, 2013, p. 426). The pressures may come about after the federal fund charges become lowered to the lower effective bound. The quantitative easing policies was perceived to create downward pressure on the levels of long term rates of interests because they reduced the duration of treasure securities held by the public. In the end, the cost of borrowing money to access mortgages, business improvement and other forms of long term lending declined.     The Federal Reserve can change reserve prerequisites specifying the amount of customer deposits banks ought to hold as deposit. The requirements of the reserve may directly or indirectly affect the liquidity available within the federal financial markets (Bauer & Rudebusch, 2014, p. 235). The American financial law decrees that there should be regular adjustments of the numerical levels of the required financial funds in the reserve. In recent times, banks have an obligation of ensuring they hold between 0-10 percent of their deposits qualifying as net transaction accounts in the reserves. This rate depends on the size of bank deposits and it is rarely used. The American congress delegated the Federal Reserve to be responsible for the monetary policy and at the same time retaining oversight responsibilities that ensure that the Federal Reserve sticks on to the constitutional directive of ensuring maximum employment and stable economic prices within the country (D’Amico & King, 2013, p. 425). The Federal Reserve has in the recent past defined the stable prices to ensure the 2 percent inflation rates become ensured. The reserve, under the national bank’s responsibility includes providing emergency liquidity by means of lender of last resort function, monetary policy, providing necessary supervision of the various types of banks and financial firms, and supervision of banks for the soundness and safety as per the regulations. The Federal Reserve aims at targeting the federal funds rate (Bauer & Rudebusch, 2014, p. 236). The reserve defines its monetary policy as per the actions undertaken to help influence the cost and availability of money to promote the goals set aside by the congress. There is an important influence due to the expectations of the business community and household consumers on America’s major spending portion. These expectations become influenced positively by the Federal Reserve’s actions. The Federal Reserve can also change the interest rates it directly administers by fiat (D’Amico & King, 2013, p. 427). The depository banks are allowed to borrow directly for the Federal Reserve on a temporary basis. These institutions can discount some of the assets they own to the Federal Reserve in order to provide temporary means of getting the reserves. The duration for discounts is usually on overnight basis. A discount rate is usually charged for the privilege to depository institutions (Kashyap & Stein, 2012, p. 267). The discount rate is set up by the Federal Reserve and is in accordance with the federal funds rate. Lending directly from the discount window is negligible under the regular financial conditions and created an important liquidity during the American recession. The Federal Reserve, in the late 2008, began paying interest based on excess and required reserves they withheld (Kashyap & Stein, 2012, p. 267). This reduced opportunity costs for the banks to hold the funds as opposed to lending thus influenced the rates at which banks were willing to lend reserve funds among themselves. In conclusion, America is on a path to financial disaster as experts project that the federal government will spend more money that it can take in. the policies in place erode business competitiveness thus creating a platform where business conditions end up deteriorating. For there to be productivity, improving human capital, using forms of capital in an efficient manner and increasing physical capital is necessary. Most public goods that the government provides contribute directly to public expenditure. Education can increase human capital and spending of building infrastructure increases the physical capital. Bibliography Bauer, M. D., & Rudebusch, G. D. (2014). The signalling channel for Federal Reserve bond purchases. International Journal of Central Banking, 10(3), 233-289. D’Amico, S., & King, T. B. (2013). Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply. Journal of Financial Economics, 108(2), 425-448. Kashyap, A. K., & Stein, J. C. (2012). The Optimal Conduct of Monetary Policy with Interest on Reserve. American Economic Journal: Macroeconomics, 4(1), 266-282. Read More