Monetary Policy Analysis

Monetary policy describes the way that central banks work to reach desired macroeconomic policy goals including overall price stability, total employment, and consistent economic growth. The Federal Reserve of the United States has certain macroeconomic goals set by Congress such as reaching full employment and ultimate price stability (Economic Outlook, 40-41). In combination with these particular objectives, the United States Congress decided that the functional behavior of monetary policy should be independent of political influence. In turn, the Federal Reserve is an agency that functions independently and free from control by the federal government. The only times in which these lines between monetary policy and politics begin to blur together have been in times of great economic hardship, but not under regular circumstances. An investigation of the relationship of monetary policy with political influences in the United States will help identify how it can operate independently as well as in the political sphere. Fiscal policy is used to describe the spending behavior of the United States federal government. Fiscal policy judgments are determined by the Federal Reserve Bank and by Congress and have absolutely no bearing on deciphering fiscal policy. The Federal Reserve implements a diverse array of policy tools to further develop its legal objectives of full employment and overall price stability. An important policy tool that is used is the target of the federal funds rate, which is the rate that is charged between banks during loans given in the short-term, known as the short-term interest rate. The Federal Reserve controls federal funds rates and provides capabilities to influence the overall degree of short-term market interest rates. Through making adjustments to the degree of short-term interest rates in reception to variations in the economic prospect, the Federal Reserve is able to impact more long-term interest rates and asset prices (Economic Outlook, 40). These fluctuations in financial circumstance also affect the spending of individuals and businesses alike. Another important policy tool that the Federal Reserve has been using since the financial crisis is forward guidance; which is related to the course of the rate of federal funds (Economic Outlook, 40). In recent years the Federal Reserve has aimed for the federal funds rate to be as low as possible (Economic Outlook, 41). Through the process of forward guidance, the Federal Open Market Committee gives an indication to consumers, companies, and potential investors regarding the anticipated position of monetary policy in the future, given the current economic circumstances. In giving data that relates to the amount of time the committee intends to maintain the target for the federal funds rate low, forward guidance can work to apply …show more content…
Through the examination of the economic forecast, the FOMC determines how the present and future paths of fiscal policy might impact major macroeconomic variables like gross domestic product development, employment fluctuations, and causes and effects of inflation (FRB, 1). In this manner, fiscal policy inadvertently impacts behaviors of monetary policy through the tides it creates in the business economy and economic future. As an example, if federal programs dealing with finances and taxes are predicted to stimulate financial prosperity and growth, the Federal Reserve would look closely at this application of macroeconomic objectives; those continuing to be the stability of prices and and total employment rates, and make the necessary changes to monetary …show more content…
This targeting is a potential factor of why politicians try to influence monetary policy and the economy as a whole. They may have personal beliefs on whether the unemployment rate is too high, GDP gaps are too wide, or even that GDP growth is not high enough. This may be an attempt to push wages above market averages and to push for full employment in search of approval (Ehrmann & Fratzscher, 958-9). It is more effective for monetary policy to operate independently from the political spectrum in order to be as efficient as possible. Monetary policy can be described as the procedure of how a country specific monetary authority controls the money supply and in most cases focuses on interest rates used to boost economic stability and growth. Typically, desired outcomes would be generally stable prices and a low unemployment rate. Theory regarding the efficacy of monetary policy also offers a new perspective based on how to create desired economic outcomes generally reported as being either expansionary or contractionary (Ehrmann & Fratzscher,