Question

Write an essay explaining the current monetary policy stance of the Federal Reserve. Your answer should include: discussion of the goals of monetary policy; what is the target variable they are using and why; how does it actually execute this policy; how and why the Fed has expanded its balance sheet to and what they current values of the monetary policy variables are. You also need to discuss: the Fed’s current behavior as a lender of last resort to the financial system and its efforts in influencing long-term interest rates.

Answer 1

Considering the aftermath of the COVID-19 outbreak and the consequent economic downturn the Federal Reserves would possibly undertake an expansionary monetary policy characterized by an increase in the overall money supply or reduction in the federal funds rate or the interest rate in the domestic money or loanable funds or money market. As a conceptual guide to understanding the impact of an expansionary monetary policy in the domestic economy, some of the effects of such policies on some of the prominent macroeconomic variables such as domestic interest rate in the money or loanable funds market, aggregate demand or AD and the existing equilibrium real output or income and the overall price level of goods and services in the goods market can be ideally considered or emphasized. This would lead to a clear understanding of the potential impacts of the expansionary monetary policy both in the short and long-run. Now, with respect to the mechanisms or procedures that Fed can adopt, some of the monetary instruments available to Fed are open market operations or buying and selling of financial securities or bonds by Fed in the financial market and adjusting the federal funds rate or the target interest rate at which the commercial banks and other financial institutions can borrow and lend excess reserves among themselves in the financial market. In this context, it is important to think about how Fed's engagement in considerably large-scale open market operations in the financial market would increase the size of Fed's balance sheet as both phenomenons are conceptually and practically related. Again, to explain this conceptual and practical relationship it is important to consider exactly what kind of open market operations the Fed would conduct to implement an expansionary monetary policy to ensure short-run and long-term economic stability. Given the extent of the overall economic impact of the COVID-19 outbreak in the US economy, the Fed is most likely to continue or extend the expansionary monetary plans or initiatives in the long-run as well until a sustainable economic growth or recovery can be achieved. In this respect, it would be helpful to think about how Fed would adjust or manipulate the long-term interest rates to consolidate the expansionary monetary policies with the main objective of inducing or sustaining long-term economic improvements and recovery.