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Role of the federal reserve
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The New Uses of Monetary Powers
Introduction
Over the past several years United States financial markets have experienced their most serious stresses and strains since the great depression of the 1930s. These stresses and strains have been due to both domestic and international developments. As a result market instruments, institutions, and usages have undergone marked changes, and the federal reserve system as well as the other agencies of the peculiarly decentralized central bank of the United States, have responded by adjusting their operations: monetary powers have been used in new ways.
Some of these new uses of monetary powers will be discussed under two headings: the guidance of the evolution of financial markets and the manipulation of uncertainty. As a result of these new uses, the domain of responsibility of the federal reserve and the relation between it and other regulatory agencies need to be reexamined.
Central banking has always been a major determinant of what is known with certainty, what is probable, and what is purely conjectural in financial markets. The evolution and developments of central banking has not been solely a reaction to an independently-evolving financial structure, but has been also a determinant of this evolution. A sophisticated central bank has always cast a “wider net” than any narrow legislated or contractural responsibilities. Thus it can be claimed that these new uses are not really new. The context, however, is new: monetary policy operations are now being undertaken in a world where active monetary and fiscal policy is used to “fine tune” the economy and where there is a wide acceptance of the view that this can be accomplished. As a result monetary policy is being carried out without the constraints upon financial positions and experimentation with new financial market usages that might result from prospects of serious business depressions. That is, fear of the proverbial income and employment “rainy day” is attenuated, and with this attenuation the emphasis on assets to protect against rainy days has decreased.
Whenever central banks undertake or to be the lenders of last resort, they act upon “confidence” and thus uncertainty; they try to diminish this uncertainty by assuring that particular adverse market conditions cannot happen. The new use of central bank powers as they affect uncertainty is a form of financial brinksmanship. The –central bank acts so that the range of “possible” market conditions increases: in a particular, market conditions which both generate losses and disrupt financial channels are permitted to develop.
money.In the line “To be made of it !” Gioia uses a hyperbole by referring to rich people as being
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
However prior to 2008, nearly everyone was blind to their impending doom; investors, bankers, government regulators, the general population, and even the chairman of the Federal Reserve, Alan Greenspan, a man who was considered the economic guru, was fooled into believing the prosperity America had been enjoying would last for the foreseeable future (“Rethinking” 20). By this time there had been only mild economic downturns or, at most, short periods of turmoil. Financial institutions and large corporations had grown accustomed to the decades of economic prosperity resulting from the post-war economic boom, long forgetting the lessons learned from the Great Depression (“Rethinking” 20). In fact, economists concluded that America had entered a new era of calm. After a generation of portfolio managers and investors profiting from decades of favorable returns on stocks they believed the modern economy was impervious to major calamities (“Rethinking” 20). As inflation rates fell from record highs in the late 1970s and early 1980s to the record lows that they are today, interest rates followed enabling Americans to borrow more money from
On the surface, central bank independence seems an eminently reasonable, appealingly simple solution for an agonizingly complex and muddled process of making economic policy in this postindustrial, electronically linked, and computerized global economy. The independent central bank is an institutional concept that complements well the counterrevolution now underway in U.S. budget policy. Washington's fiscal policy is locked into a deficit-cutting mode for the near future, while Congress is determined to retreat from all discretionary spending, regulatory intervention, or measures to improve equity in the distribution of national income and wealth.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.
Major banks are cutting back on some of their legally permitted operations, such as- market making, and that has led to liquidity issues in the bond markets. Proprietary trading could become unregulated if more banking activities continue moving towards the shadow banking system. This would essentially defeat one of the main purposes of Volcker Rule. [d] The third major unintended consequence has been the degree by which the Federal Reserve has become the main regulator of the finance industry. In order to discourage future bailouts similar to the ones during the financial crisis, the Dodd-Frank Act limited the Fed’s emergency powers. However the liquidity and capital standards now imposed by Fed has purportedly become one of the most important regulatory developments of the Dodd-Frank Act.
The seventh chapter asks, ‘Why Do Central Bankers Have Power over the Economy?’. In this chapter, the authors evaluate the power of central banks during normal and tough times and question whether central banks ‘have the power to control something as huge as the macroeonomy’ (p.74).
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
Author Unknown (1994). The Federal Reserve System: Purposes and Functions (5th ed.) Published by Library of Congress
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
As we are moving to the end of the course, we want to present you with the Federal Reserve System (Fed), which is the central bank of the USA. We are going to explore the roles of Fed in regularizing the economy, its function, and also the tools used in doing that. We will learn how central banks regulate the banking system and how they manage money supply in economies. We will also be presented to the financial crises lessons we can be able to understand the importance of the regulatory system; and then, we answering questions such as:
Smaghi, L. (2009, Aprl 28). Conventional And Unconventional Monetary Policy. Speech at the International Centre for Monetary and Banking Studies (ICMB), Geneva. Retrieved from http://www.bis.org/review/r090429e.pdf
The invention of money is perhaps one of the greatest achievements of human civilization. From the very beginning of society, people have used money to circumvent the difficulties of bartering and to foster trade and commerce. Since then, money has come a long way. No longer do we need to rely on silver coins, cocoa beans, or even anything of intrinsic value to conduct our business; today, we use paper currency, which is convenient and easy to carry around. But slowly, we are moving into the digital age of money, an age in which less of our money is actually tangible and more of it is just data on a computer server. To some, this prospect may seem daunting. However, given the major advantages of electronic money over outmoded paper counterpart, society as a whole should embrace the upcoming era of digital money.