Question

Some economists contend that the Federal Reserve’s sequential targeting strategy for implementing monetary policy does not work, others contend that it is highly effective. What do you think? Discuss both the strengths and weaknesses of the Fed’s sequential targeting strategy.

Answer 1

In my opinion Federal’s reserve strategy is very effective for implementing monetary policy. The Federal Reserve is the only government agency who holds the power and the authority for the manipulation of the interest rates in the country. The federal parliament has two chief policy goals- Firstly to keep the interest rates fairly constant and secondly maintaining a productive and a sustainable economy. Both these policy goals needs long period interest charges. The Federal Reserve applies tactics to retain the central funds rate close to its goal and sets a standard for the central reserve rates which act as a benchmark for controlling the interest rates for the financial institutions that further advance loans to the potential investors. Thus the central funds amount assists as a standard for various other short period interest charges and which in turn largely effect credit circumstances.

Strengths

1. Stable prices: When there is an inflation Fed may sell government bonds to take money out of circulation or increase short-term interest rates. It may result other institutions and banks to raise the long term rates. It decreases the access to credit, slows down consumer spending and thus counters the inflation.

2. Long-term perspective: Short run actions help the policy makers for the assessment of the economic conditions, promotion of the sustainable growth which consequently lowers inflation over the long term.

3. Currency stability: The stability of currency and enhances the smooth running of the economy. It is done by setting a range within which the interest rates cannot go beyond to curb inflation and deflation which can weaken the dollar value against foreign money.

4. Transparency: It brings stability and restores the confidence to the investors especially when the financial institutions are providing the directions to lend at a fairly constant rate and thus enhances a sound monetary system

Weaknesses

1. Time lags: The Federal Reserve monetary policy decisions may take long to have the intended impact.

2. Conflicting goals: When the economy is growing with lower unemployment, inflation may increase temporarily. It leads the monetary policy action to slow growth and decrease the inflation. When inflation goes down jobless rate it may increase temporarily as the rate of economy declines.