How Has The U.S Economy Performed According To The Federal Reserve
Introduction
The Federal Reserve or the ‘Fed’s’ acts as the nation’s central bank and is mandated with the duties of performing four significant categories. They include the provision of emergency liquidity, monetary policy, supervising how certain banks are run as well as other integral financial organizations for both financial soundness and safety. It also provides payment system services both to the government and commercial organizations. The monetary policy responsibility is given to the ‘Fed’s’ by Congress. They maintain oversight over their activities to ensure that they adhere to statutory mandates of keeping prices stable, moderate long-term interest rates, and maximum employment. This paper will evaluate the conduct of monetary policy, developments in the economy, and suggest policies for future improvement following the Federal Reserve’s Current Monetary Policy.
How Has The U.S Economy Performed According To The Federal Reserve
While the COVID-19 global pandemic has caused a lot of tragic human problems in terms of the suffering, it has inflicted and the lives lost in the process. Also, to control and mitigate the spreading of the virus, the pandemic has directly affected the state of the United States economy. Here, the country’s GDP decreased by 4.8% in the first quarter of the year (2020) and continues to decline at an unprecedented rate in the second quarter. For instance, the rate of unemployment, which recorded the lowest percentage for over 50 years, stood at 3.5% in February and increased to 14.7% in April. Such means that many people lost their jobs between March and April.
However, while the financial news has been quite awful, financial conditions in mid-March have seemingly eased, something the Federal Reserve attributed to the implementation of the changes took during its March 15 meeting. This included the creation of new facilities for providing credit to support credit flows to companies and households. There is also the robust expansion of existing foreign exchange arrangements with critical players in the banking sector. While the easing of the country’s financial position has been welcomed by many, the success of such projects will depend primarily on the course COVID-19 decides to take and its effects.
The Federal Reserve’s Current Monetary Policy And Strategies For Future Improvement
The current United States monetary policy requires paying interests on absolute reserves. This allows the ‘Fed’ to use this interest as a tool for monetary policy to influence the activities associated with bank lending. For instance, if today the FOMC wanted to establish a more substantial bank lending incentive to excess reserves, it can do so by decreasing the level of interest it pays in all excess reserves. This, therefore, means that the ‘Fed’s’ control of monetary policy originates from its exclusive ability to alter the credit conditions and chain of money supply. It has direct control over the monetary base, which consists of Federal Reserve currency notes as well as bank reserves.
In the second emergency response to the COVID-19 pandemic, on March 15, 2020. The regulatory body decreased its targeted rate of funds from around 0% to almost 0.25%. These changes are meant to provide relief and support the economy during this uncertain and challenging time. That said, given the power to run the monetary policy decision-making process, I propose the introduction of a clear report on the country’s economic projects with all available elements in all existing media and publications. I would also reinforce more commitment to ensuring price stability as well as maximum sustainable employment. These are factors which, in the past, have helped the country to improve is economic performance. Lastly, there is a need to simplify all related public statements by clarifying how the policy’s implementation will affect the changing situations in the future.
Should The Federal Reserve Intervene When The Economy Is Performing Poorly?
It is essential to highlight that the ‘Fed’s’ are doing all they can and introducing a variety of tools meant to aid the economy through this ‘COVID-19 era’. These policies are also geared at helping the revamp of activities after the pandemic is as swift as possible. However, the Federal Reserve’s statutory mandate only gives it lending powers and not enough spending powers. Such means that it is not allowed to grant money to individual beneficiaries, to cater to payroll expenditure when it comes to small businesses, and to mitigate the unemployment perks of displaced staff. These activities solely rely on fiscal policy. After all, ‘FED’ can only carry out loans to solvent organizations knowing that the said loans will be paid back (citation).
How Has Is The Current Federal Reserve Monetary Policy Affected Financial Markets And Institutions?
The objectives of sound monetary policy are meant to improve the state of employment, create stable prices, and moderate short as well as long-term interest rates. Through this implementation of effective monetary policies, this regulatory body can safely maintain stable prices to open the platform for the long-term growth of the economy.
With that in mind, the Federal Reserve has increased interest rates in the presence of a massive balance sheet with the help of two newly introduced tools. This includes: paying banks interest on reserves and by carrying out reverse repurchase deals. Back in January 2019, it announced that it would proceed with using these stools in setting permanent interest rates. In August, the same year, it halted the balance sheet’s reduction from its current 3.8 trillion dollars. Despite this, the remaining stimulus programs, such as the Mortgage-Backed Securities (MBS), would be slowly replaced with specific securities from the Treasury once they mature. This caused a substantial amount of problems in the repo market only a month after the implementation of the changes making ‘forcing’ the Fed to start intervening through the expansion of its balance sheet in the next month (October 2019).
Lastly, the Federal Reserve believes that the rate of unemployment is lower than that which it considers to be maximum employment. Similarly, inflation seems to be running slightly below the 2% Fed objective. Hence, despite the controversial decision to reduce rates in 2019, it felt that the economy was performing well, and risks such as higher tariffs were yet to materialize. In doing so, it was also able to avoid economic inflation, overheating, and asset bubbles.
Conclusion
The Covid-19 pandemic poses one of the most severe threats to employment and achieving price stability. There is still a lot to be done when it comes to making policy on how to handle the economy in months or years to come as the extent to which the virus will last is still unknown. Although the future brings a lot of uncertainties, the Federal Reserve intends to continue acting in a proactive, aggressive, and forceful way in carrying out the mandate given to it by Congress.