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Explanation of the Federal Reserve
The Federal Reserve Act that was approved in the United States led to the creation of the Federal Reserve, which is widely known as the Fed (Hubbard & O’Brien, 2008). This enactment followed the harsh financial crisis that had hit the country.
Over the years, the Federal Reserve System has changed into a large institution that performs monetary roles and responsibilities. The Federal Reserve System serves as the central banking system of the American economy.
In addition, the main roles of the Fed are to oversee the implementation of monetary policies, ensure effectiveness in banking operations, and/or maintain efficiency in payment systems. Therefore, the Federal Reserve stabilizes prices to ensure reasonable interest rates in the economy.
Employment opportunities also increase through proper implementation of the Federal Reserve System. The paper presents the major tools that the Federal Reserve System can use to boost the US economy. Besides, the study offers some recommendations that Fed can adopt to perfect its mission.
Tools the Federal Reserve can use to boost the Economy
The major tool that the Federal Reserve can use to influence the economy is the open market operation. A committee created by the Fed administers the open market operations to implement the monetary policy. Open market operations refer to selling and buying of government securities to influence interest rates on a short-term basis.
The growth of money and credit in the economy arises from the influence of the open market operations in the United States. The Fed plays the role of a lender to financial institutions to enable them meet short-term financial needs.
It offers them loans on a discount to ensure the stability of reserve supply and demand, thereby affecting the economy in a positive way. In addition, Fed uses other approaches such as controlling reserve requirement and discount rates to boost the economy.
When the stored money is reduced, economic output goes up in a country since financial institutions have enough funds to give. If raised, the fiscal supply declines, thereby restraining growth because monetary associations lack sufficient funds to disburse (Hubbard & O’Brien, 2008).
The reserve requirement is the amount of funds that the Fed requires all financial institutions to hold for purposes of lending when any need arises. Moreover, the Fed remains in control of charges, which comprise the interest rates that banking institutions pay for loans that they get from the central banks.
Recommendations to the Fed
When faced with a high-interest rate environment, the Federal Reserve System can adopt considerable measures that promote economic growth in the quest to prevent severe financial crises such as the great depression that once hit the United States.
In my opinion, the Fed can adopt suitable monetary policies to deal with high-interest rates to promote GDP growth. Since factors such as demand and supply of money are the major determinants of interest rates, they play a vital role in promoting economic growth.
A high interest rate environment results from an increasing demand for money. To ensure economic growth, the Fed will need to implement measures that maintain a favorable demand for money such as ensuring that the right amount of money is in circulation.
Expansionary monetary policies are necessary in a high-interest rate environment to promote GDP growth because expansionary financial guidelines increase the supply of money in the economy, thus reducing unemployment and lowering the interest rates. The significant role played by the Federal Reserve System ensures economic growth by controlling the GDP.
Hubbard, G., & O’Brien, A. (2008). Macroeconomics. New Jersey, NJ: Pearson Educational Incorporated Publishers.