Research Paper on Fed Monetary Policy: Structure & Effects on US Economy

Introduction

The United States Federal Reserve System provides the guidelines regarding the structure of the central banking system (Hetzel & Richardson, 2018). The Federal Reserve System regulates the US economy by controlling key determinant factors of the economy, such as interest rates. The system is comprised of the board of governors, 12 Federal Reserve banks and the Federal Open Market Committee (FOMC). The Fed monetary policy supports economic growth, improving the employment rate, stabilizing the demand and supply of products and services in all sectors of the US economy (Anzuini, Lombardi, & Pagano, 2012).

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Interest Rate Policy

FOMC has gradually continued to increase the target for the federal funds since July 2018. The current interest rates for federal funds range between 1.75% and 2% (Anzuini, Lombardi, & Pagano, 2012). This shows that the US economy is growing steadily and has significantly reduced the rate of unemployment, reduced price inflation and achieved currency stability (Melendez, 2019). The gradual increment of the policy rate supports the labour market and the possibility of achieving the target rate of 2% inflation rate. The significance of the United States Fed monetary policy is that it controls the interest rate cycles in the economy (Clarida et al., 2000). These cycles generally last for three years. I agree with the monetary policy as research studies have indicated that the economy has grown in terms of increasing the employment rates and reduced inflation.

Effects of the Fed Monetary Policy on the Demand and Supply of Goods and Services

The Fed monetary policy can impact the price of products and services and also their demand and supply (Anzuini et al., 2012). Variations in interest rates of federal funds influence the borrowing behavior of both companies and households; additionally; the rates influence long term interest rates such as interest rates charged on mortgages and bonds. Moreover, variations in the long-term interest rates affect assets costs; for instance, the exchange rate of the dollar and equity costs (Hetzel & Richardson, 2018). Therefore, the monetary policy affects economic activity of the country. When rates decrease, firms and households are attracted to borrow and hence have a higher purchasing power. When the federal funds rate is lowered, it increases aggregate the demand. According to Melendez (2019), if the amount of money circulating in the economy is high, it attract firms to borrow money, and therefore there will be a corresponding increase in investment, which means arise in the supply and aggregate demand for products and services.

Effects of Keeping Interest Rates Too Low For an Extended Period

Keeping interest rates low for a long period causes inflation and recession. Although inflation is an indication of a strong economy, if it is left unchecked, it reduces the purchasing power (Clarida, Richard, Gali, Jordi, Gertler, & Mark 2000). The Fed controls the rate of inflation by increasing the federal funds rate or reducing it. In the years 1981 through 1982, the inflation rate of the US economy was 14% per year; the fed increased the interest rates to 20% (Hetzel & Richardson, 2018). The result of this increase was a recession that was solved by lowering interest rates. On the topic of loans and interest rates, Jesus refers to this in several instances (Matt 25:27; cf 21:12; Mark: 11:15). Meaning he understood that the banks were able to regulate the economy of that time by increasing or reducing interest rates on money lent and invested.

Currency Used in the Bible

An example of currency used in the Bible is 'Aghorah', a term that roughly translates to a piece of silver 1sa 2; 36 (International Standard Bible Encyclopedia). One can conclude that there existed both rich and poor people during that period. This can be interpreted to mean that the supply of the 'Aghorah' was regulated such that people were not equally able.

Conclusion

To sum up, it is clear that the Fed monetary policy influences several aspects of the US economy. The federal funds rate influences the interest rate of short term and long term loans, the amount of money in circulation, and the rate of borrowing. Interest rates in turn influence the demand and supply of goods and supply. It is indisputable that the Fed monetary policy exerts immense pressure on the US economy.

References

(n.d.). Retrieved from http://www.federalreserve.gov/faqs/currency-coin.htm

(n.d.). Retrieved from http://www.federalreserve.gov/faqs/money-rates-policy.htm

(n.d.). Retrieved June 24, 2019, from https://www.khanacademy.org/economics-finance-domain/macroeconomics/monetary-system-topic/modal/v/monetary-and-fiscal-policy

Anzuini, A., Lombardi, M. J., & Pagano, P. (2012). The impact of monetary policy shocks on commodity prices. Bank of Italy Temi di Discussione Working Paper, (851).

Clarida, Richard, Gali, Jordi, Gertler, & Mark. (2000, February 01). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory *. Retrieved from http://qje.oxfordjournals.org/content/115/1/147.

Hetzel, R. L., & Richardson, G. (2018). Banking and Monetary Policy in American Economic History from the Formation of the Federal Reserve. The Oxford Handbook of American Economic History, 2, 277.

International Standard Bible Encyclopedia - Bible Encyclopedia. (n.d.). Retrieved from http://www.studylight.org/enc/isb/

Melendez, S. (2019, May 23). Impacts of Monetary Policy. Retrieved from https://smallbusiness.chron.com/impacts-monetary-policy-5218.html