Monetary and Fiscal Policy - Working Together
Monetary and Fiscal policy are important to every economy. The Federal Reserve and Government are in charge of monetary and fiscal policy respectively. The Federal Reserve has three tools to control monetary policy: open market operations, reserve requirements, and the discount rate. The Government is in charge of fiscal policy and uses taxes and spending as tools to change policy. Monetary and Fiscal policy are adjusted when signs of inflation, deflation, stagflation or hyperinflation start to arise or are in full swing. Monetary and Fiscal policy matter to everyone because they affect everyone.
Monetary and Fiscal policy are important to every country and every economy. When changes to these policies are made everyone is affected because we all use money. The authorities in place do their best to maintain a balance in the economy where there is growth, but not too fast or too slow. The decisions that are made through monetary and fiscal policy direct and persuade people to act a certain way with their money (either keep or spend it) to help the economy stay as stable as possible. In the United States the Federal Reserve and the Government try to make these decisions with people’s best interest in mind. The goal of monetary policy is to keep unemployment low, inflation low, encourage economic growth and keep a balance of external payments (Financial Pipeline, n.d.). According to the Federal Reserve website, “The term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals” (Federal Reserve n.d). The Federal Reserve (“Fed”) is the authority over monetary policy. There are seven members that make up the Fed board, and constitute the majority on the Federal Open Market Committee (FOMC). The FOMC is comprised of twelve people all together; the other five people are Federal Reserve Bank presidents. The Fed controls monetary policy using three tools: 1. Open Market Operations; 2. Reserve Requirements; 3. Discount Rates. The FOMC is responsible for open market operations, while the Federal Reserve Board is in charge of reserve requirements and discount rates. Open Market Operations occur when the FOMC decides to take money out of, or put money into the economy. This is accomplished by either selling or buying bonds, bills or other financial instruments. There are eight scheduled meetings per year of the FOMC where that decision is made. According to the Federal Reserve website, “At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth” (Federal Reserve n.d.). Currently the Federal Reserve Bank of New York is being kept busy with open market operations. Investors are running to the safety of Treasury’s because of the exposure financial institutions have to soured mortgages, and the fact they fear a recession (Ip, 2007). The second tool in the Federal Reserves control is the amount of money banks need to keep in reserves (reserve requirement). Banks are responsible for reporting to the Fed annually, quarterly, or weekly their cash position through the FR2900. The Fed looks at the net transaction accounts, total deposits, and vault cash to determine how often banks need to report their cash levels. Calculations are then made off of these reports to determine what reserves should be kept at the Federal Reserve Bank. The level and amount a bank should keep is called a reserve tranche (a portion of something, especially money) and the following levels are: Banks with $0-$8.5million 0% in reserve, $8.5million to (and including) $45.8million 3% in reserve, above $45.8million 10% in reserve (Frs Reporting Reserves, n.d.). If...
References: Financial Pipeline. (). Retrieved November 17, 2007, from http://www.finpipe.com/monpol.htm
Bankrate.com. (). Retrieved November 19, 2007, from http://www.bankrate.com/brm/ratewatch/fedDiscountRate.asp
The Federal Reserve
Federal Reserve. (2007, November 20). Board of Governors of the Federal Reserve System. Retrieved November 13, 2007, from The Federal Reserve Web Site: http://www.federalreserve.gov/monetarypolicy/fomc.htm
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Heakal, R. (2004, May 19). What Is Fiscal Policy? Retrieved November 25, 2007, from http://www.investopedia.com/articles/04/051904.asp
Ip, G. (2007). It 's Official: Wall Street Correction. In P. Steiger (Ed.), The Wall Street Journal (p. C1). New York, New York: Dow Jones & Company.
Ranson, D. (). Inflation. The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved November 25, 2007, from http://www.econlib.org/library/Enc/Inflation.html
Us Info. (). Retrieved November 16, 2007, from http://usinfo.state.gov/products/pubs/oecon/chap7.htm
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