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Stable prices in a long-term run are requirements for moderate long-term interest rates, maximum employment, and sustainable output growth. This is because, when prices are stable, the prices of services, goods, labor, and other materials are usually less affected by inflation. They also provide guidelines for the allocation of national resources and support services, thereby contributing to higher standards of living (Grey, 2002). Additionally, stable prices normally enhance capital formation and savings. This is because when the value of assets are being eroded due to inflation, there is always a need guard the assets against losses. This usually encourages businesses to invest more while households are encouraged to save more (Grey, 2002).
The Federal Reserve Banks control the market for balances, which provides the initial link between the economy and the monetary policy. Depository institutions usually hold accounts at the Federal Reserve Banks, and they trade their balances at the federal funds market at a certain interest rate referred to as the federal funds rate (Grey, 2002). The Federal Reserve Banks have significant influence on the federal funds rate via its influence over demand and supply of the balances, at its premises. The Federal Reserve Banks normally set the federal funds rate at a level, which enhances monetary and financial conditions that are consistent with the monetary policy objectives. These banks also manipulate their targets that are consistent with the emerging economic developments (Grey, 2002). Therefore, a slight change in the federal funds rate and expectations about the future targets of federal funds rate can trigger a number of events, which will affect other long-term interest rates, short-term interest rates, stock prices, and foreign exchange of the dollar (Grey, 2002). Changes in these variables, in turn, affect businesses and households’
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Indeed, its confusing structure, organization, and responsibilities make it difficult for American's to understand. In explaining the Federal Reserve, the New York Times describes it as having, “exercised more influence over economic growth and the level of employment than other government entity.”
In simple terms, the Federal Reserve came into being by enactment of the Congress. Consequently, the Congress has the obligation of overseeing the monetary policy and the Federal Reserve. This paper analyzes the importance of the Federal Reserve and strategy in stabilizing the economy of the country.
It strives to be as realistic as possible by considering events that took place since the latest economic recession in 2008. Many unfavourable events affected the Fed since then. Recommendations for improvements in the roles of the Fed were included. There were significant initiatives by the Board of Governors since mid-2012.
Over the years, the system and structure if the federal reserve has evolved to meet the effects of economic crisis and great depression in the economy. The Federal Reserve System was created under the Federal Reserve Act in order to address the issue of panic in the banking industry and acts as the final check point and regulator in the clearing system and the banking industry.
They jointly implement the monetary policy which is set by the Federal System. Every Federal Reserve banks governs the regulation of commercial banks in their district. Alexander Hamilton, the first secretary of treasury of United States, proposed the idea of instituting a National Bank in order to develop the country in terms of all the financial aspects.
It is worth noting that the collapse of the mortgage market was necessitated by Fed lax on the money market. The Federal Reserve addresses the economy by regulating financial institutions, setting monetary policies and operating the countries payment systems.
Similarly, an increase in the money supply increases the cost of loans and people spend less. This reduces the money supply in the economy. Similarly, when interest rates decrease the exact opposite happens and money supply in the economy increases.
1b) Open-Market Operations: In this method, the sale and purchase by central bank in the security market has desired effect on the money supply in the economy.
Monetary policy is the actions taken by the central bank to influence the availability and cost of money and credit to assist in promoting national economic goals. The Fed's monetary policy decisions affect the flow of money and credit in the economy.
The Federal Reserve System includes the Federal Open Market Committee, the Board of Governors, and the Federal Reserve Bank Presidents.
It will also evaluate the policies that Federal Reserve used to fix the recession to explain why it was effective in the same. The research arguments will be derived from published articles, credible websites and datasets all for
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