Policy Actions of the Board of Governors
In the most recent period, the Board of Governors has engaged in such policy actions as issuing rules and regulations, presenting policy statements, and setting discount rates for depositary institutions. According to the 2022 annual report, the rules and regulations were concerned with changes to the regulations governing the Fedwire Funds Service (Board of Governors of the Federal Reserve System [BGFRS], 2022). Other aspects in this regard included debit card transactions’ procession through a minimum of two unaffiliated payment card networks and the implementation of the Adjustable Interest Rate Act (BGFRS, 2022).
Policy statements mentioned in the latest published report were concerned with the revisions of testing strategies, supervision frameworks, guidelines for assessing account and service requests, payment system risks, and interests on reserve. Discount rates for depository institutions are issued every fortnight by the Federal Reserve Bank’s boards of directors (BGFRS, 2022). The Board of Governors performs the function of reviewing these rates and issuing the final decision.
The Performance Based on the Opinion of the Federal Reserve
According to the self-evaluation of the Federal Reserve, the U.S. economy’s performance has been highly effective recently. The Board of Governors reports the expansion of economic activity at a stable rate (BGFRS, 2023a). The Federal Reserve admits that there has been a decline in job gains, but it is considered to remain in a strong position. Furthermore, the BGFRS (2023a) emphasizes the low rate of unemployment as a favorable outcome of its activity. The Federal Reserve acknowledges that the inflation rates remain elevated (BGFRS, 2023a), which is a deficiency that needs further improvement.
In the assessment of the U.S. banking system, the Federal Reserve emphasizes its resilience and sensibility. The Federal Reserve notes that its greatest commitment at the moment is returning the inflation rate to the two-percent point (BGFRS, 2023a). The BGFRS (2023a) reckons that tighter credit conditions that it has set both for individuals and businesses have the capacity to impact such crucial economic processes as hiring and inflation. While the Federal Reserve notes that the long-term effects of these aspects are undetermined, they are paying close attention to inflation risks in order to prevent possible adverse events.
Current Monetary Policy
The current monetary policy pursued by the Federal Reserve is a combination of conventional policy, which sets the rate of the federal funds, with the policies that function through the term structure slope. The latter include large-scale asset purchases and forward guidance (Eberly et al., 2020). These approaches are especially significant when the federal funds rate is “at the zero lower bound” (Eberly et al., 2020, p. 5). The current policy signifies a considerable transformation from the Federal Reserve’s ‘easy money stance’ position that prevailed earlier. Starting with the financial crisis in 2008 and up until recently, the funds rate was between 0.00% and 0.25% (“Federal Reserve focuses,” 2023). Meanwhile, with the inflation upsurge in March 2022, the Federal Reserve changed its course and promptly increased rates throughout the rest of 2022 and into the present year.
If I were the monetary policy decision-maker, I would follow the same strategy. Currently, monetary policy aims at providing a proactive reaction to the changes in the country’s economy concerning inflation, employment, and long-term interest rates (BGFRS, 2023b). I think that the focus chosen by the Federal Reserve is the right one. However, I would pursue the average inflation targeting, which, as explained by Svensson (2020), has the potential to manage the challenges posed by the binding effective lower bound. Another suggestion is to pay more attention to the potential impacts on financial stability. A balanced approach is necessary in this regard since excessive tightening, as well as unreasonable easing can affect monetary policy in a negative way. With the former, a financial crisis may develop, whereas with the latter, asset bubbles may emerge.
Agreement with the Federal Reserve’s Intervening
I agree with the Federal Reserve taking action to intervene when the economy is not well-functioning. While the effect of such mediation is unpredictable, the Federal Reserve takes all measures to ensure the promotion of price stability and maximize employment (Bernanke, 2020). When the economy is not at its best, the Federal Reserve can address challenges through such actions as introducing unconventional monetary policy tools, adjusting the interest rate, and offering forward guidance. Therefore, even though some policies may result in potential unintended threats to the economy, the overall intentions of the Federal Reserve’s intervening in the state of poor functioning of the economy are beneficial.
The Current Monetary Policy’s Impact
The current monetary policy of the Federal Reserve has been influencing the financial markets and institutions in several major ways. First and foremost, the Federal Reserve sets the federal funds rate (FFR), which is the rate of interest at which banks lend funds to one another (Powell, 2020). Fluctuations in the FFR have a decisive effect on other economic factors, impacting the borrowing costs for individuals and institutions. Also, the Federal Reserve influences bond prices as it conducts open market operations on purchasing and selling government securities (Eberly et al., 2020). Apart from these functions, the monetary policy affects equity markets, exchange rates, and credit conditions.
References
Bernanke, B. S. (2020). The new tools of monetary policy. The American Economic Review, 110(4), 943-983. Web.
Board of Governors of the Federal Reserve System. (2022). 109th annual report of the Board of Governors of the Federal Reserve System. Web.
Board of Governors of the Federal Reserve System. (2023a). Federal Reserve issues FOMC statement. Federalreserve. Web.
Board of Governors of the Federal Reserve System. (2023b). Monetary policy report. Web.
Eberly, J. C., Stock, J. H., & Wright, J. H. (2020). The Federal Reserve’s current framework for monetary policy: A review and assessment. International Journal of Central Banking, 16(1), 5-71. Web.
Federal Reserve focuses monetary policy on fighting inflation. (2023). U. S. Bank. Web.
Powell, J. H. (2020). Opening remarks: New economic challenges and the Fed’s monetary policy. Proceedings – Economic Policy Symposium, 1-18. Web.
Svensson, L. E. O. (2020). Monetary policy strategies for the Federal Reserve. National Bureau of Economic Research. Web.
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