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... Unlike the monetary policy run by the Fed, fiscal policy is carried out by the government, and so politics play a key role in the policy. ... Congress structured the Fed to be independent within the government. That is, although the Fed is accountable to the Congress, it is insulated from day-to-day political pressures. ... The Fed has three main tools to carry out monetary policy: interest rates, reserves, and open market operations. ... For example, when demand contracts and theres a recession, the Fed can temporarily stimulate the economy and help push it back toward its long-run level of output by lowering interest rates. Therefore, in the short run, the Fed is concerned with stabilizing the economy. ...
The first tool of the Fed is interest rates. ... It is generally understood that lower interest rates are used by the Fed to stimulate the economy in down times, but this can be tricky because of inflation. ... Traditionally, one would look at the two nominal interest rates (8% and 4%) and say that the Fed was trying to stimulate the economy more in the case of 4% because it was a lower rate. ... If the Fed isn’t careful, it is possible to over-do its interest rate tool. ...
The other two tools available for carrying out monetary policy are the control of reserves and open market operations by the Fed. This tool of the Fed is the purchase and sale of government securities in the open market in an attempt to control the amount of money in circulation. ... For argument’s sake, and in order to differentiate among the Fed’s tools, this should not be confused with reserve requirements, which is the third tool for the Fed. ... If the Fed purchases securities from the general public (and banks for that matter), it is increasing the monetary base. ... Another way to increase reserves is for the Fed to purchase securities from banks. ... Control of the monetary base isn’t an easy task for the Fed, but it manages to get it done.
Reserve requirements are the third tool that the Fed has at its exposure. ... This idea states that as the Fed supplies banks with additional reserves, deposits in the banking systems increase at a multiple rate. ...
Those are simply the basics on how the Fed uses its arsenal of tools. ... But with the long lags and uncertain effects of monetary policy actions, the Fed must be able to anticipate the effects of its policy actions into the distant future. ... In order to have the desired effect on the economy, the Fed must take into account the influences of these other factors and offset them. ... In order to determine when its policies will take effect, the Fed looks at a whole range of indicators of the future course of output, employment, and inflation. ... Implementing and enforcing monetary policy is no easy matter, which is why such an important and complex organization such as the Fed takes on that responsibility. ... Inside the Fed: Making Monetary Policy.
Approximate Word count = 2728
Approximate Pages = 10.9
(250 words per page double spaced)
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