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The federal reserve - Essay Example

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The federal reserve

Close co-ordination between the Federal Reserve and the Government of the USA is essential, because monetary policies should be in sync with fiscal policies for an effective and sustainable economic growth in the long run. Role of Federal Reserve in stabilizing economy The steps taken by the Federal Reserve, for example by increasing the interest rates to reduce inflation will have an impact on industrial production, consequently on employment. Therefore regulating interest rates in an economy by the Federal Reserve is a balancing act which takes into account several factors after analyzing the economic indicators. The Federal Reserve has an option of regulating money supply in the economy to regulate growth. Providing liquidity into the economic system by regulating money supply has its impacts on financial markets. Handa (2009, p. 429) observed “Many central banks, especially in financially developed economies, nowadays choose to use the interest rate, rather than the money supply, as the primary monetary policy instrument, while leaving the money supply endogenous to the economy.” Any change in the federal fund rate has cascading effect on short-term and long-term interest rates, foreign exchange of USD and stock prices. The cumulative effect of these impacts reflects in demand patterns and eventually spending by the businesses. In an economic slowdown, if the situation remains unchecked the multiplier effect caused in this process might lead to recession in the economy. Therefore, the role played by Federal Reserve in stabilizing economy through its monetary policies is very significant. Economic Indicators and Federal Reserve’s Policy Changes Since policies of the Federal Reserve are concerned with employment, inflation and output, the economic indicators which are relevant in this regard are required to be carefully analyzed by the Federal Bank. Several economic indicators relating to employment, inflation and output or growth are used for this purpose. Analysis of the National Employment Report will be useful in assessing the employment situation in the country. There are various indicators available with regard to unemployment. ‘Initial Jobless Claims’ released weekly indicates the number of new people claiming unemployment benefits. This is regarded as a highly useful indicator. Consumer Price Index is relating to inflation as it underlines the cost of living. The other indexes such as New Residence Sales reflect consumer confidence which reinforces the assessment with regard to consumer spending. Gross Domestic Product reflecting industrial growth should be consistent with the other indicators as it represents the overall status of the economy. Business Inventory and Industrial Production and Capacity Utilization Reports related to the industries will confirm the trends in industrial growth. Trade balance or reports on imports and exports are important from the international trade point of view. US Dollar Exchange rate and Stock Market Indices are also the important economic indicators available on daily basis. Spanjers (2009, p. 10) stated “As the expectation of stable exchange rates tends to promote trade and thus welfare, the monetary authority of each country commits itself to exchange rate targets.” The policy of the Federal Bank is reoriented in line with the overall assessment of the economic indicators for adopting effective course of action. Money Supply Federal Reserve ...Show more

Summary

The Federal Reserve Introduction The Federal Reserve sets the nation’s monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. (Federal Reserve System, 2011) Inflation, interest rates and employment are interdependent in an economy…
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