US Federal Reserve

US Federal Reserve



Abstract

In this study, we try to explore the concept of “US Federal Reserve” in a holistic context. The focus of the research is on “US Federal Reserve” and its relation with “Financial Market”. The research also analyzes many aspects of “US Federal Reserve” and tries to gauge its effect on “Current Economic Activity”. Finally, the research describes various factors, which are responsible for “US Federal Reserve”, and tries to describe the overall effect of “US Federal Reserve” on “Financial Market”.

US Federal Reserve

Introduction

Modern study of economic instability in the United States begins with the Great Depression. Prior to the 1930s, economists treated macroeconomic instability as a difficulty best resolved by private markets. Indeed, the U.S. financial system had even operated for most of the pre-Depression period without a central bank. There had been two experiments with a Bank of the United States but, for a variety of reasons, neither survived its initial 20-year charter. During the nineteenth century, the United States had experimented with a number of currency and banking regimes. With the gold standard officially adopted in 1900, the United States entered the new century without a central bank. The next financial panic in 1907 convinced Congress that the economy did need a central banking authority to ensure the soundness of the country's banking system. The Federal Reserve Act of 1913 created a system of 12 regional Federal Reserve Banks, with the New York bank assuming control of monetary policy. The U.S. banking system now had a lender of last resort

Body: Discussion and Analysis

Along with increasing its transparency, the Federal Reserve has been edging toward a de facto target range. In 2002, the term comfort zone appeared in a New York Times headline (Stevenson, 2002) and has subsequently been used by the Fed governors themselves to describe their desired inflation level. Still, they seem to lack credibility in this target, as admitted by Bernanke (2004): “Today long-term inflation expectations in the United States remain in the vicinity of 2-1/2 to 3 percent, above the range of inflation that many observers believe to represent the FOMC's implicit target.”

Although much of the Fed's attention during the later part of 2008 was dedicated to the ongoing financial crisis, the minutes of the December 16, 2008, Federal Open Market Committee meeting reveal the participants' deliberation whether “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability.” The financial market turmoil drove the nominal interest rate toward its lower limit of zero. An explicit positive target rate of inflation may be needed to keep the nominal interest rate positive in the wake of large negative demand disturbances, such as a financial crisis. Matt Klaeffling and Victor Lopez Perez (2003), for instance, find that the presence of the zero bound implies that the optimal rate of inflation should be somewhat higher than in its absence, even if higher long-term inflation generates stronger macroeconomic ...