The Federal Reserve Monetary policy

Introduction The Federal Reserve is the central bank of the United States whose unique structure includes the Board of Governors, in Washington, D.C., a federal government agency, together with 12 regional Reserve Banks. It was initially created by the congress to stabilize the country’s financial system. (Board of Governors of the Federal Reserve System (U.S.), 1974).

Factors that influence the federal system in adjusting discount rates The bankers bank: when depository institutions pay interest on money they borrow from the federal reserve, the interest rate comes out as discount rates. As the discount rate is passed on to us, loan interest start fluctuating. Adjusting for inflation: when businesses rise prices, the federal reserve tries raise the discount rates so as to cut demand.

Cont’ Adjusting for recession: after a recession, the federal reserve try's to lower the discount rate so as to avoid a depression. It in turn encourages borrowing so that the public can get back on its feet financially. Discount rate adjustments: fluctuations in interest rates affects businesses profits according to how the federal reserve adjusts discount rates.

How the discount rate affects decisions of banks in setting their specific interest rates As the discount rates lower, the banks are able to get loans from the federal reserve and even loan out more to its customers. Money supply in turn increases. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How monetary policy aims to avoid inflation Monetary policy influences the economy's demand for goods and services as well as inflation. As the federal reserve system reduces interest rates, there is an increased demand for goods and services which in turn pushes wages and costs higher. It finally shows demand for materials and workers needed for more production. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How monetary policy controls money supply If the federal system buys back, already issued securities, for instance, money supply, from security dealers and large banks, money supply is increased in the hands of the public. However, money supply is decreased when the federal reserve sells securities. (Board of Governors of the Federal Reserve System (U.S.), 1974).

How a stimulus program(through the monetary multiplier) affects money supply The money multiplier is constituted by the additional amount of money generated by every additional dollar reserved. Money multiplier can be then used to assess and model money policy decisions. Money movement can be restricted to move in the economy by the monetary policies. Money moves faster when interest rates are low.

Indicators evident that there’s too much or too little money within the economy. How monetary policy aims to adjust this. Inflation, monetary and fiscal policies are good indicators. If inflation goes high, there are greater injections than leakages. Monetary policy affects economy’s interest rates. High interests encourage savings rather than spending. When inflation goes high, interest rates are raised to cut down consumption and hence demand.

Differences between the federal reserve and the Bank of Canada. Bank of Canada is accountable to the minister of finance( governmental policy control) while the federal reserve system is accountable to no one (no governmental policy control) The federal reserve operates on its own (on private basis) which is the opposite of Bank of Canada. (Board of Governors of the Federal Reserve System (U.S.), 1974), (Bank of Canada, 1971)

References Board of Governors of the Federal Reserve System (U.S.). (1974). The Federal Reserve System: Purposes and functions. Washington, D.C: Board of Governors. Bank of Canada. (1971). Bank of Canada review. (ProQuest 5000 International.) Ottawa: Bank of Canada.