Sunday, September 8, 2019

Th fed-how it manages the economy and the federal open market committe Essay

Th fed-how it manages the economy and the federal open market committe - Essay Example The fed uses its monetary policy to influence the availability and cost of money and credit to help promote national economic goals (Federalreserve. Gov). Among these functions the FOMC is responsible for the open market operations (buying and selling of government bonds to the market) function of the Fed. With the use of this tool through FOMC, the Fed manages the economy by balancing the balancing the interest rate according to the economic objective of the government. In simple language, FOMC can help expand the economy by reducing the cost of money to business by lowering the interest rates that would encourage them to expand their business operation which would in turn have a ripple effect of job creation, increased domestic spending and higher tax collection. During an overheated expansion of the economy, monetary policy can also be used to manage its ill effect which is usually inflation (too much money circulating in the economy). This can be done by raising the interest rates or cost of borrowing which would constrict the money supply and therefore arrest inflation. This function â€Å"mops out† excessive liquidity in the market to abate the effect of an â€Å"overheated† economy by raising interest rates which would otherwise led to an â€Å"overheated economy†. During a crisis such as the recent financial crisis that begun late of 2008, monetary policy was used to increase money supply by lowering the interest rates to push for an expansionary economy and abate the effect of the crisis. In the 2008 crisis, the Fed pegged â€Å"short-term interest rates to near zero† and bought â€Å"huge amounts of long-term Treasury debt and mortgages to push down long-term rates† (Wessel). The objective of adopting this monetary policy through FOMC was (1) signal that the Fed would keep short-term rates low for a long time, (2) drive long-term consumer and business borrowing rates lower

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