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141106 Monetary Policy In The U Essay

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Monetary Policy in the United States
In reference to the economy of the United States, the term monetary policy is used to refer to the actions, which the Federal Reserve undertakes in order to regulate the amount of money as well as credit in the economy of the US (Arestis, 45). Whenever there are changes in the quantity of the money and credit in the economy, the interest rates are affected. As a result, there are effects on the economic performance of the country. In the simple terms, the concept implies that whenever the cost of credit (interest rates) reduces, there is an increase in the amount of money borrowed. Therefore, the disposable income increase and the economy will heat up. There are two primary goals of the monetary policy in the United States (Hester, 56). The first objective is promoting maximum sustainable output and employment in the country. The second objective is promoting stable prices to check on inflation. With the current economic situation in the United States, one can argue that the Federal Reserve is succeeding in its attempt of using monetary policy in tweaking the country’s economy to the right levels. The Tools of Monetary Policy

The Federal Reserve uses three primary tools in influencing monetary policy (Rabin, 330). First, it employs the use of Open-Market Operations. The Federal Reserve (Fed) buys and sells the securities of the US government in the financial market on a constant basis. In turn, it influences the level of reserves within the banking systems. The decision also affects the volume as well as the prices of credit (interest rates). In an open market, the fed does not independently decide on the securities dealers to engage with in business on any day. There is an open market with high competition among the securities dealers. Fed frequently employs this type of market as its tool to manipulate the monetary policy. Second, Fed sets the Discount Rate that is usually lower compared to the federal funds rate. Discount rate refers to the interest rates, which banks on the short-term loans borrowed from Federal Reserve banks (Arestis, 46). It is significant since it represents a visible announcement of the changes in the monetary policy of the Fed. It also gives an insight of the plans of the Fed to the rest of the market. The third tool used by the Fed is setting Reserve Requirements. This refers to the amount of the physical funds, which depository institutions are supposed to hold in reserve alongside the deposits in banks. It helps in determining the amount of money that banks can generate using loans and investments. It is the responsibility of the Board of Governors to set the reserve requirements (Hester, 53). In most cases, it is set at 10%. The primary purpose of the reserve requirements is ensuring that depository institutions are encouraged to maintain a minimum amount of the physical funds within their reserves. To sum it up, the Fed has employed the above three tools in regulating its monetary policy. This has helped the economy of the United States to be among the top world economies. In ...

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