Essay on The Federal Reserve Manages Monetary Policy

782 Words Jan 11th, 2016 4 Pages
The Federal Reserve manages monetary policy to achieve the following goals: price stability, high employment, economic growth, and financial market stability. To achieve these goals the Fed will decrease or increase money supply through open market operations as well as make changes to the required reserve ratio, discount rate, and interest rate.

At the beginning of 1991 unemployment was an issue that needed addressing.

To address this issue the Fed implemented a monetary policy which reduced the federal funds rate.

The 1990 Gulf War led the U.S. to a recession lasting from July 1990 to March 1991. During this recession, the unemployment rate rose to 6.8% eventually peaking at 7.8% in 1992. “The Fed reacted by steadily reducing the federal funds rate from 6 percent in mid-1991, to 4 percent by the end of 1991, to 3 percent by October 1992, where it stayed until February 1994” (Goodfriend, n.d.). As a result, unemployment rate fell from 7.8 percent to 6.6 percent.

The Fed’s decision to reduced the federal funds rate resulted in an increasing demand for goods and services which leads to higher wages. Ultimately, this action resulted in a greater demand for workers. This monetary policy succeeded in achieving its goal of high employment.

“The Fed had shifted to an expansionary policy as the economy slipped into a recession when Iraq’s invasion of Kuwait in 1990 began the Persian Gulf War and sent oil prices soaring. By early 1994, real GDP was rising, but the economy…

Related Documents