The Federal Reserve Policy

The Federal Reserve Policy

The Federal Reserve, commonly known as the Feds, has an ultimate mandate in the regulation of the amount of money being supplied within the economy. As such, there are several tools that it uses to manipulate this outcome, either to the negative, or to the positive. For instance, the sale and purchase of treasuries, otherwise known as “open market operations”, is one plausible way that the Feds can use to increase the supply of money into the public. Being similar to the process of manipulating interest rates, this tool allows the Feds to buy bonds, which directly pumps more money into the economy (Lawler, 2007). Secondly, manipulation of short-term interest rates is yet another way the Feds could employ to increase money supply, especially when such rates are lowered. This is as a result of increased borrowing, leading to more cash available for public spending. However, this tool has faced considerable debate, due to its actual effect on inflation rates. Thirdly, the Federal Reserve could decide to adjust the reserve requirements of each financial institution, especially the banks, a move which dictates how much each bank can hold based on deposited liabilities (Lawler, 2007). If this reserve requirement is lowered, it means the banks will not be bound to hold lots of money, either in vault cash or deposits, but would have the liberty to offer as much loans as they can handle.

The question of whether the Feds can precisely control money supply is highly debatable, and from the perspective of this paper, very unlikely. This is due to the fact that there is usually a lot of unregulated money that flows in and out of the economy, such as those of unregistered businesses, black markets, and even those that are completely off the records (Lawler, 2007). As such, the Federal Reserve could only try up to some limit, but a complete certainty of control is not pragmatic.

References

Lawler, TA 2007, ‘Federal Reserve Policy Strategy and Interest Rate Seasonality’, Journal Of Money, Credit & Banking (Ohio State University Press), 11(4), 494-499.

ACED ESSAYS