The Federal Reserve Board and Monetary Policy

Monetary Policy is a broad term used to relay the activities employed by the Federal Reserve Board (Fed) to monitor and shift the country’s monetary and financial credit status quo in an effort to attain conditions favorable to those of the population as a whole.

For the most part, favorable conditions refer to such ideals as consistent prices on consumer goods and services (Consumer Price Index is a measure of these figures,) low unemployment rates and an abundance of economic expansion. Consistent prices are characterized as those that alter amounts at a moderate (not overly fast or slow) rate. Thus, persons are not overly affected by fluctuations in price.

Economic expansion is a reflection of how the financial structure of the country adapts to the fluctuation in prices. Hence, the level at which growth is sustainable relates to the speed at which the financial arena can comfortably grow without causing inflationary prices to spiral out of control. Sustainable growth is measured by the increase in hours worked by employees in the US as a whole, as well as, the amount of output produced per employee.

The Federal Reserve Board establishes the federal rate by setting a benchmark for rates charged when one financial institution lends to another. As the federal rate is the amount financial institutions are required to pay when they borrow funds it, in turn, impacts what they charge when they loan money, as well. The rates established also impact short-term rates, not to mention financial activity and inflationary rates on a larger scale.

To invoke monetary policy, the Federal Reserve utilizes open market business activities to impact the dollar figures that financial institutions can loan. Overall, this authority practice allows the Federal Reserve to alter the movement of financial both up and down.

Should the Federal Reserve buy securities, it puts additional funds into the economy, provides financial institutions with additional moneys to lend and drives down the official federal rate. Conversely, should the Federal Reserve opt to sell securities, this act reduces funds the financial institutions have to lend while pushing up the federal rate.

Even the most knowledgeable of financial experts have difficulty predicting how the Federal Reserve will respond to specific economic conditions. However, one can say with certainty, that the Federal Reserve does have the authority to impact short-term rates as well as to create an ideal environment for financial expansion.

Yet, it is not the Federal Monitory Policy alone that impacts the US economy. Rather, it is the Policy in combination with the volatility of both domestic and international markets, consumer spending and employment statistics that, in consort with one another, all work together to determine the economic fate of our country.