Question

Why does Fed revise its earlier estimates of monetary aggregates?

Answer 1

Money Aggregates is the level of money in circulation in the United States which is estimated by the Federal Reserve for the future coming periods.

The Federal Reserve is the Central bank of the United States, which is primarily responsible for setting in guidelines for commercial banks, as to the minimum capital which they must hold at all times, and directly impacts the flow of money in circulation in the economy by altering the same or changing the interest rates which it charges from commercial banks, thus making loans expensive or cheaper and altering the flow of money as and when required.

For example, during an inflation, the key target of the Federal Reserve is to reduce the supply of money, which it does by increasing interest rates or using other strict measures such as increasing the reserve requirements and this makes the currency in circulation lesser than it used to be. All these actions are taken by the estimation of monetary aggregates by the Federal Reserve.

But. it is to be remembered that these monetary aggregates are subject to change in an economy which goes through a serious shock. For example, currently the economy is going through a sudden recession due to the corona virus and the aggregate demand for goods and services shrunk rapidly and reduced the level of money in circulation by a large amount. This then required the Federal Reserve to revise the Monetary Aggregates to accommodate for the shock which was unexpected.

Thus, we can say that the Fed revises its monetary aggregates in response to a shock that may take place in the market place due to sudden changes in the economy.

Please feel free to ask your doubts in the comments section.