What Are The Impact Of The Unconventional Monetary Policy

When there are problems in the United States economy, whom do the people turn to? The most obvious answer is the government. The federal government is given the responsibility of maintaining a stable economy. When the economy is not stable, like during a recession, the American people turn the government and demand that they fix whatever problem is occurring. The government can handle the economy in a recessionary period in one of two ways: expansionary fiscal policy or expansionary monetary policy. The sector of the government that handles the economy using these policies in a recession is the Federal Reserve. The best course of action to get the United States out of a recession is to use expansionary monetary policy.

Using quantitative easing has helped the recovery of the USA and other developing countries. The Fed’s then limited their ability to pursue more measures, but congress ignored those appeals to help support the economy. The Fed’s decided to use smaller steps to help investor expectations and to prevent a possible financial crisis in Europe. In 2011 it was announced that the FED’s would hold short-term interest rates close to zero percent through 2013; to help support the economy. Soon after it was announced that using the “twist” operation would push long-term interest rates down, by purchasing $400 billion in long-term treasury securities with profits from the sale of the short-term government debt. Inaugurating a policy to help shape market expectations, which will raise interest rates at the end of 2014.

Federal Reserve Chairman Ben Bernanke 's meeting dealt mainly with the issues that could stabilize the economy after the great recession. After creating a number of policies to fight the 2008 crisis, Chairman 's move to further reduce Quantitative Easing was a bit of a disappointment. The Fed will reduce its purchases of long-term Treasuries and mortgage-backed securities by another $10 billion a month. Apart from this, Fed is going to concentrate on maximizing employment rates, stabilizing prices and interest rates.

The Federal Reserve System is the most powerful institution in the United States economy. Functioning as the central bank of the United States, acting as a regulator, the lender of last resort, and setting the nation’s monetary policy via the Federal Open Market Committee, there is no segment of the American economy unaffected by the Federal Reserve [endnoteRef:1]. This power becomes even more substantial in times of “unusual and exigent circumstances,” as Section 13(3) of the Federal Reserve Act gives authority to the Board of Governors to act unilaterally in lending and market making operations during financial crisis[endnoteRef:2]. As illustrated by their decision making in the aftermath of the 2007-2008 Great Recession,

Some of the solutions included obtaining long-term securities aimed at reducing the pressure on long-term interest rates and overall

To begin, the article explains the Federal Reserve’s plan to take a careful approach to enacting contractionary monetary policies, policies used to decrease money supply, in the future. Last December the Federal Reserve raised the interest rates after they had been near zero for years to ensure inflation was kept in check and to promote economic growth. It appeared the economy would be in for another increase in the interest rates sometime this year, but the Feds have rethought that strategy. If the Federal Reserve were to continue to raise interest rates it would have short-run and long-run effects on the Money Market, Goods and Services Market, Planned Investment, Phillip Curve, and Aggregated Supply and Demand. These effects are aspects that have to be considered because they express and explain the effects the increase in interest rates has on the economy and explain if the Federal Reserve is enacting the correct policy to achieve their goal.

economy from a recession, and it was the lowest rate level in nearly forty years. Money was available to American consumers who were drivers to two-thirds of the U.S. economy to borrow it easily and cheaply to spend in order to stimulate the U.S. economy. (CNBC, 2014) A former Fed economist, David Jones stated, “Only the Fed can create money out of thin air in these crises when everyone panics and liquidity dries up”. According to David, It was a remarkably stable financial situation compare to how big the September 11 crisis was. (Egan, 2013) The Fed loaned more than $45 billion to many financial institutions and it provided a quick stability to the U.S. economy. The Fed’s action was a key to dampen the potential financial crisis followed by the September 11 attacks on the U.S. centers of power, and economic market stability went back close prior to September 11 by the end of September. (Federalreserveeducation.org, 2014) Then how might the Fed action have affected the foreign flow of funds into the U.S. and affected the value of the dollar?

Following a cut in the discount rate (the rate at which the Federal Reserve lends to depository institutions) in August of that year, the Federal Open Market Committee began to ease monetary policy in September 2007, reducing the target for the federal funds rate by 50 basis points. As indications of economic weakness proliferated, the Committee continued to respond, bringing down its target for the federal funds rate by a cumulative 325 basis points by the spring of 2008. In historical comparison, this policy response stands out as exceptionally rapid and proactive. In taking these actions, we aimed both to cushion the direct effects of the financial turbulence on the economy and to reduce the virulence of the so-called adverse feedback loop, in which economic weakness and financial stress become mutually reinforcing. (Bernanke, “The Crisis and the Policy

Some experts believe that Trump’s economic policies will increase the inflation rate. Trump’s considered spending on infrastructure will potentially lead to an enlarged employment rate and a larger money supply within the economy. If exchange wars with China and Mexico actually happen, import prices could increase, which will lead to inflation. For example, just after the election results were broadcasted, the Mexican peso plummeted 7.3% opposed to the US dollar. The United States is responsible for a respectable amount of Mexico’s imports. Other countries around the world will be impacted by this. Elevated inflation expectations have induced universal alarm among investors, producing a bond sell-off (specifically for fixed-income treasury bonds whose profit gets consumed with a higher inflation rate.) The selling of bonds has caused a fall in bond prices. Bond yields on the other hand have risen.

Since the start of quantitative easing the world’s central banks have printed billions of their respective currencies to buy financial assets from commercial banks and other institutions. Bond and equity markets have adjusted higher and income inequality in advanced economies has risen.

Amid the past FOMC meeting international value costs increased, shared assets picked up and developing business sector spreads limited. The FOMC members anticipated that the close term forecast for real GDP growth was weaker then there previous expectation. Real GDP was expected to expand at a slower rate in the primary quarter than in the fourth quarter, however growth was projected to move back up in the second

In September 2015, Donnan and Flemin (2015) made a statement: “Fed urged to hold fire on rates or risk sparking emerging market panic”. The main purpose of this essay is to discuss and analyse the potential implications that an interest rate rise by the Federal Reserve would pose upon emerging markets, while capturing the wider issues associated with interest rates, macro factors and the welfare of the world economy.

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

As interest rates bottomed out quickly after the onset of the recession, the Federal Reserve could no longer stimulate the economy with traditional and time-tested techniques. The controversial and unconventional method chosen by the Federal Reserve, and other central banks around the world, is known as “quantitative easing” (QE). QE functions by injecting large amounts of reserve capital into commercial banks with the hope that those banks will then be willing to lend the money at affordable interest rates. Ideally, the addition to economic activity affected by the influx of capital to banks should keep the value of the dollar relatively low, avoiding deflation and encouraging foreign investment by those wishing to take advantage of an affordable dollar. The cheaper dollar should also make American exports look more attractive to potential consumers in other countries. If interest rates stay low, and banks begin lending again, consumer and investor confidence should hopefully rise, leading to more spending and thus, economic growth.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.