where the Federal Reserve can sell and buy securities that can alter the supply of money.
Chairperson of the Fed Board
It is important to know who is Chairperson of Board of Governors is. In the
United States Allan Greenspan is our chairperson that is in charge of the Federal Reserve
System was appointed by former president Bill Clinton. Allan Greenspan is considered
to be the single most powerful influence on monetary policy in the nation. The chairman leads
the six people on the board of governors, who are appointed by the President and confirmed by
the Senate for 14-year terms. Each of these governors represents a different region of the United
States. The Federal Open Market Committee (FOMC), includes the seven members of the Board
of Governors, and the five presidents the Reserve Banks. The purpose of the Federal Open
Market Committee is to set objectives for the growth of money supply and credit.
What is Monetary Policy
Monetary Policy was formulated by the Fed to regulate the growth of money supply;
controls the cost, and availability of money. This is used as a means of helping to promote high
employment, economic growth, price stability, and a sustainable pattern of international
transactions. The primary tools of monetary policy include open market operations, discount
policy, and reserve requirements. Open Market operations as mentioned earlier with more detail
is the purchases and sales of government securities in the open market by the Federal Reserve
Bank as directed by the Federal Open Market Committee in order to influence the volume of
money and credit in the economy.
Purchases inject reserves into the depository system and foster
expansion in money and credit; sales have the opposite effect. Open market operations
are the Federal Reserve's most important and most flexible monetary policy tool. They
are used to promote either higher or lower growth in money and credit and to offset
undesired changes in the reserve positions of depository institutions stemming from
movements in currency, float, Treasury deposits, and other factors. The second primarily
tool is discount policy.
The discount rate is the interest rate charged to commercial banks
and other depository institutions on loans they receive from their regional Federal
Reserve Bank's lending facility. The third primarily tool is to set reserve requirements.
Reserves that must be held against customer deposits of banks and other depository
institutions. Reserve requirements are the amount of funds that a depository institution
must hold in reserve against specified deposit liabilities.
Within limits specified by law, the Board of Governors has sole authority over changes in
reserve requirements. Depository institutions must hold reserves in the form of vault cash, or
deposits with the Federal Reserve Banks. A benefit to the reserve banks would be if the Fed
lowers the reserve requirement banks would have more money to lend, and money supply would
increase. Monetary Policy is very important because it affects economy according to
inflation, GDP, and un-employment.
Understanding the Federal Reserve System and Monetary Policy would help sellers,
buyers, businesses, and investors get a better meaning of the economy. This will help why
thing’s happen for a reason, knowing the key factors that are effective in ever-day business
would better educate the individual in handling business more accordingly and creditable. More
winners, than losers, that the Federal Reserve System and Monetary Policy were
intended to help make the economy grow.
Understanding Monetary Policy to the economy
When the supply of money grows too rapidly in relation to the economy's ability to
produce goods and services, inflation may result. It is a case of too many dollars in the
hands of buyers chasing the same amount of goods., but if there is to little growth of
money supply this can lead to a recession, or even a severe depression. The Great
Depression was the last known depression to be stated, millions of workers lost their jobs
and the un-employment rate reached about twenty five present .
With Monetary Policy being effective the Federal Reserve System tries to avoid
situations. The Federal Reserve System analyzes, and seeks to influence the national
economy in the growth of money supply, high employment, and economic growth. The
three tools that the Federal Reserve System uses according with monetary policy was
already describe but lets get a better understanding how those tools take effect to our
economy as it is being implemented. One way the Federal Reserve System can influence
the economy is in the open market as mentioned earlier, they can buy and sell U.S
government securities which alters the bank reserves. By doing this the Federal Reserve
can distribute the money among financial institutions.
The Federal Reserve can also have a powerful impact on the flow of money and credit by either raising or lowering reserve requirements, the percentage of their deposits that financial institutions must keep on reserve. If the Fed lowers reserve requirements, this can lead to more money being injected into the economy since it frees up funds that were previously set aside. On the other hand, if the Fed raises reserve requirements, it reduces the amount of money that institutions are free to loan out or invest. However, the Fed is cautious about changing reserve requirements and has done so only occasionally because of the dramatic impact it can have on both financial institutions and the economy.
The growing economy is important to every individual. There is a saying that most people like to say is that “Money makes the world go round”, that money does play an influence in the economy, and with the Federal Reserve System in place, regulating, and supervising we know that the economy is in good hands. The tools that they use are useful because they tend to not just analyze a short period, but also look at the long run, by predicting changes that can occur that can either benefit the economy or harm the economy.
There are factors that play important roles in the Federal Reserve System and Monetary Policy. To have an operating Federal Reserve System, we need to understand the factors that contribute to the growth of economy such as the output of the economy, employment, and the inflation rate which to every individual comes as a threat with inflation of interest rates come into mind. Most people feel that the Federal Reserve System is doing an excellent job in aggregating these factors. When we look at output we again look at the open market, where the government is trying to increase the growth of money supply.
Employment can be looked at as when there is more money to go around, firms are capable of hiring more, therefore can decrease the unemployment rate, and inflation can be beneficial as-well, in some cases during a recession inflation can decrease or increase in certain area’s of the market, but to the individual they tend to save more of their earnings. When interest rates are low it allows individuals to take advantages of obtaining low rates on loans as opposed to when the economy is high inflation is high, interest rate is high making it hard to obtain those loans.
Monetary Policy tools effecting Economy
The three tools of Monetary Policy were Discount Rate, Setting Reserve Requirements, and Open Marketing Operations, which were already discussed. Knowing what Discount rate is already, we now can look at how it influences the economy today in the article “The New Discount Window” (Stevens, 2003). He talks about how there are new regulations on the way credit will change, and is rationed at the Federal Reserve System. The Reserve Banks used to charge a below-market discount rate, but under the new system, the discount rate normally will be significantly higher than market rates, but loans will be available to any sound institution.
For the past twenty years Federal Reserve Banks made loans to deposit institutions at interest rates below the discount rate window. Things have changed, on January 9, 2003; Reserve Banks have raised their discount rates by 150 basis points to a level higher than the federal funds rate. With this new implementation being effective on banks borrowing from reserve banks, there is no change in monetary policy, but rather one of operational procedure. The intention is to rely on an above-market discount rate instead of the administrative devices of 12 Federal Reserve Banks to ration borrowing at the discount window.
This new change on the discount rate has been effective, the discount rate acting as a ceiling, and keeping Federal Reserve funds at target. Like open market operations, an increase or decrease in lending at the discount window also adds or drains bank reserves. The success of this change is the elimination of a subsidy in the discount rate, meaning the elimination of financial assistance by one person, or by government that affects discount rate. Another benefit is it should prevent the actual fed funds rate from exceeding the discount rate so long as depository institutions feel free to borrow at the window.
Slow Economy, Increase Money Supply?
When the economy is doing slow, low interest rates, and inflation rates almost near zero as stated in the article “Federal Reserve Should Act Now, To Increase The Money Supply” (, 2002). The article talks about having some inflation rather than having a deflation. If people think the price will be lower in the long run, and saving accounts are paying nothing, people will rather save or not invest their money at all. The problem will cause products to be unsold, and make it hard for business’s to make risks pay off; make a profit. Helping to fix the situation, economist argued to increase the money supply by printing more currency. The problem with this idea is that most countries had negative results.
More money led people losing their fate in the currency; caused them to cash out for U.S money, or other currency with more stability of value. Re-inflation into currency should be minor, so that it is unnoticeable, and money that is in circulation does not lose its value. The Fed has come up with a solution with a slowing economy during the 1980’s. Instead of focusing on interest rates, more focus will be put on the level of money supply-growth which is consistent with price stability, and markets will determine the interest. Today’s economy, the problem is low interest, and low inflation; makes the solution of level of money-growth being consistent with price stability might be unattainable by the central bank.
Central bank being affected, we can now look at the reserve requirements that are implemented to prevent having low inflation, and low interest rates. One tool is the regulation of interest rates among banks, part of the reserve requirements. Banks need to borrow money, which is a big reason of the reserve requirements set by the Fed. Most of the money a bank has re-invests in the community through loans for business’s, and households. But a certain amount must be kept in the vault. If the Fed raises this requirement, then the bank must hold more money, and that tends to raise interest rates. Lower the reserve requirement will allow more money being lent out, with the money supply increased; market rates fall.
United States Disaster, but Federal Reserve operating
The Federal Reserve being the central bank for United State’s, it control’s, and regulates the monetary base for the economy affecting interest rates, and inflation; provides liquidity in times of crisis, and ensures the general integrity of our financial system. In the article “The U.S. experience with a federal central bank system”(Santomero, 2002). In the events of September 11, 2001 the decentralized structure of the central bank has been a positive force. With the events following after the tragic disaster, Anthony M Santomero points out that the central bank has done a good job keeping everyone operating.
The decentralized structure kept the payments system operating, provided access to credit for affected banking institutions, and implemented aggressive monetary expansion. He believes that the decentralized structure of the central bank, and according to a disaster such as the September 11, 2003: provided local context, and contact needed for effective policy making. Anthony M Santomero quoted “The structure of a central bank must fit the economic and political realities of the time”. The statement is a true statement in order for any bank to survive in much adapt to new changes in the economy, and new demands that it much face.
What Allan Greenspan would do?
Allan Greenspan, the chairperson of the Federal Reserve System. The role of the chairperson has already been discussed; we can look at what Allan Greenspan has done to the economy. One example will can look is the war on Iraq in today’s economy. The first war on Iraq during the 1990’s caused the United States economy to weaken, oil prices soaring, and markets panicking. In return the Allan Greenspan, with the Federal Reserve in his hand cut the interest rates down. Today’s war with Iraq, Allan Greenspan quoted “that the economy is fundamentally sound and that growth will recover as soon as "geopolitical uncertainties" are resolved” (Andrews, 2003).
Economist stated that the uncertainties are increasing; business confidence among the Fed is low. Unemployment has continued to rise; output of production has been fluctuating. If the war continues to make the economy worse, and for it to bounce back; the Fed will put money into the economy by reducing interest rates even more. The economy feels to bad-mouth Allan Greenspan on the situations that are leading to a downfall in the economy, but in essence to a political standards “Greenspan's policies have dovetailed fairly well with Bush's goals” (Andrews, 2003). With today’s war on Iraq the inflation rates are low making the possible deflation a threat to the economy.
The first war on Iraq during the 1990’s were worried about the high impact of oil prices, today the Fed is less worried about the high impact of oil prices. Allan Greenspan stated that the Fed can easily reduce interest rates without causing inflation. Allan Greenspan has created optimism among business, and investor’s confidence among the economy. Allan Greenspan stress’s on the point quoted “confidence will rebound as soon as shooting subsides in Iraq”. He feels that once the war is done in Iraq everything will return to normal, in a way in his look at the long run view; could be possibly right. We are dealing with short run views. We can’t explain the sudden fluctuations that occur in the short run, because there are many factors that come into play. Allan Greenspan is focusing more on the long run view, than what can be done in the short run, by fixing the problems that are being created by the war.
Economist Reflect their Opinions
To my personal learning’s of an economist from my macroeconomic class, is someone that studies the economy in a whole, or in small parts. Looks at the long run view according to the classical model, or looks at the short term view according to the short term model. Economist help explain while recessions, or expansions take place, and how the Federal Reserve System is going to adapt to the situations to either help the economy grow buy purchasing more government bonds or sell government bonds and decrease the money supply. In general the Money Supply is a very important issue because in essence too little of it can cause a recession such as the “The Great Depression” where everyone ran to the banks and withdrew their deposits, and the war playing a role to the situation as well.
One economist, Larry Kudlow stated from his article “How to follow the money” (Kudlow, 2003), the slowdown of money could lead to a downfall in liquidity from the Fed affecting the stock market, as-well as the economy. In his article he looks at the value of gold, and states that the liquidity which is the most is gold since its sensitive measure has gone up from two hundred and fifty dollars roughly two years ago, to about three hundred and seventy dollars today. These shows the Fed reflect on injections of cash. Injections are government spending and investments. Kudlow states that it’s enough to end the deflation threat both to the economy, and business profits. The article speculates on how the central bank is creating more liquidity, than less of it.
When the central bank buys a Treasury bill from a bank or a broker, it pays for it with new cash. This cash enters the economy. And when the Fed sells a Treasury-bill to primary dealers, it removes cash from the financial system, which is decreasing the money supply. The main issue of his article is the liquidity, in short run periods it goes up and down, it fluctuates. Liquidity and its sensitive prices that are traded in the open market are much better measures of money supplied by the Fed, and money demanded by the economy. Larry Kudlow believes that the value of the dollar will decrease, and in his article he quotes of Treasury Secretary John Snow that rising economic growth will bring higher interest rates during the next year or two.
Kudlow believes that he is signaling a stable or even stronger U.S Dollar. Larry Kudlow hopes that the Federal Reserve System lets market price indicators guide liquidity, and setting interest-rate targeting policy. In regards to his closing he states that if the central bank stays clear and focuses that a result would be a justifying expansion in the economy. The article reflects Larry Kudlow view towards the growing economy, and how some measures of the Fed are being changed for example with liquidity being stronger than the value of cash in accommodating a growing economy. Larry Kudlow is contrasting the difference of the liquidity of gold to the value of paper issued money. He points out how liquidity can increase the money supply, and help stabilize the economy.
Conclusion
The first banking system of the United States failed to carry out operation functions dealing with financial. The early bank’s issued their own individual banknotes, making it hard for other banks to accept that form of currency among banks. The failure of the original banking system gave rise to a even stronger system that still exist today, the Federal Reserve System. The Federal Reserve System needs for requirements for it to be operational. First it needs a monetary system to create and transfer money, second it needs financial institutions, and third it needs financial markets to facilitate the transfer of financial assets among individuals, business, and government. Fourth it needs policy makers who pass laws and make decisions according to fiscal policy.
The Federal Reserve Act of 1913 established the Federal Reserve System as the central bank of the United States. There are twelve regional banks, for Florida the main district bank is located in Atlanta. Board of Governors, there is seven, and their primary job is to regulate and implement according to monetary policy which is to regulate and control the growth of money supply. Three tools used to allow monetary policy to function correctly. The first is setting up the discount rate, second setting up reserve requirements, and third open market operations.
Examples of how the Federal Reserve System has shown us, how they stimulate the economy by allowing growth to take place among businesses. (Stevens, 2003) Talks about the discount rate, and how changing the rate can affect the bank’s from borrowing from the district bank, and how it can affect making loans out when the discount rate has been change.
The role of Alan Greenspan during economic issues stated that it’s best to wait things out, and allow the economy to restore on its own as stated in (Andrews, 2003). Examples during economic disaster’s that the Federal Reserve System will pump money into the economy to allow growth to occur without the occurrence of a recession possibly as talked about in (Santomero, 2002). Economists have their own views on to stimulate growth, and how other forms of currency contribute to growth discussed in the article (Kudlow, 2003).
As the end of 2003 is near, and soon the beginning for a new year, 2004 can we expect to see more changes occur from the Federal Reserve System. During hard time’s, such as the recent tragedy of September,11, 2001 we experience a recession that has come into control now with GDP being at 8 percent now, and things are looking to get more better from now on. Pumping money into the economy during economic hard times help continue a growing economy. The year 2004 is just around the corner, what does the Federal Reserve System have in plans now, only time can tell, economist can predict but sudden changes in the economy can be unexplained for in short term situations. Allan Greenspan term is over in 2004, who we be next to keep the economy pumping.
The blood of our founders created the United States with laws, but in modern day economy in 2003 money is the factor. As the saying goes “Money Talks”, it’s the money that builds the economy now, sure rules and laws carry out day to day order, but it’s really the money that rules everything around us. We work for money, we want more of it, and we can’t get enough of it. Federal Reserve System was created to allow us to grow, and have stability in the growth of money among business’s, individuals, and government.
References
Kudlow, Larry (October, 2003). How to follow the money. Town-Hall on the web, 14 paragraphs. Retrieved October 29, 2003 from the World Wide Web
Stevens, Ed (May, 2003). The new discount window. Retrieved October 29,2003 from the World Wide Web
Santomero, Anthony (July, 2002). The U.S. experience with a federal central bank system. Retrieved October 30, 2003 from the World Wide Web
Tampa Tribune (December, 2002) Federal Reserve should act now to increase the money supply. Retrieved October 30, 2003 from the World Wide Web
The Federal Reserve System, History, Function and Organization, Retrieved August
30, 2003 from the World Wide Web:
Andrews, Lewis (March, 2002) Even in wartime, Greenspan sets his own course.
Retrieved November 6, 2003 from the World Wide Web
Mayer, Christopher (2003, November) The Fed, Then and Now. Retrieved
November 25, 2003 from the World Wide Web
