Monetary Policies

Monetary Policies

Definition

Monetary policy is the part and parcel of the economic policy that uses money as a variable to control and maintain economic stability. To do this, authorities use mechanisms such as the variation of interest rate and participate in the money market. When central banks wants to increase the amount of money, it is called expansionary monetary policy, and when central bank wants to decrease the supply of money, it is known as contraction-backed monetary policy.

It greatly influences individuals, as it is the source in determining inflation, employment, and also determines the spending power of individuals. When there is regression in economy, central banks always go for expansionary monetary policy, as to stabilize the economy, due to expansionary policy, people borrow more money, and invest in the economy, thus creating jobs in the economy and reducing unemployment. Similarly where there high inflation, usually restrictive monetary policy is applied, in order to control inflation by selling T-bills, so in this way monetary policy influences inflation, economy, and employment (Faust and Henderson, 2004).

The policy has been the response of the Fed and most central banks around the world to a crisis unparalleled since the Great Depression of the thirties. A policy has been to massive injections of liquidity and that meant an enormous expansion of the balance sheets of central banks (monetary base increases), especially in the case of the United States and United Kingdom. This has helped prevent deflationary scenario and lay the foundation for recovery, but a monetary expansion of such magnitude maintained over the medium term, generate strong inflationary pressures. To prevent this from happening end, it is necessary to consider the normalization of monetary policy, ie, an exit strategy.

Federal Open Market Committee (FOMC)

The Federal Open Market Committee - Eng. Federal Open Market Committee (FOMC), division of the Federal Reserve Board , which determines the framework of monetary policy. The Federal Open Market Committee consists of the Board of Governors, which consists of seven members, and five presidents of Reserve Banks. President of the Federal Reserve Bank of New York is in committee on a permanent basis, while the other Reserve Bank presidents are periodically changed, having worked on the committee for one year (Eijffinger and Geraats, 2006).

Federal Reserve System (FRS) affects the money supply by conducting open market operations, buying and selling government securities. For example, to reduce the money supply, or reduce the amount of money in the banking system, the Fed sells government securities. Meetings of the Committee, which are secret, are the subject of great speculation on Wall Street, as analysts try to predict the Fed will reduce or increase the money supply, which in turn will cause interest rates rise or fall.

Structure of Management

The Committee consists of 12 “voting” associates, which include all seven board members of the Fed, as well as the presidents of five Federal Reserve Bank. The head of the Federal Reserve Bank of New York is a member of the Committee on an ongoing basis, while the ...