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Finance & Accounting
Pages 4 (1004 words)
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.
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. ...
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