Money Supply And The FED Coursework – Coursework Example
MONEY SUPPLY AND THE FED WORK number: The Fed has been made independent from politics by the sheer fact that its 7 members serve a confounding term of 14 years and are cannot be fired by the president, a factor that safeguard it from the daily political pressure. The board is appointed by the president and confirmed by the Senate to ensure that it is free from political preferentialism. It also generates its revenues without relying on the Congress ensuring that the Congress does not use its economic power to coerce the Fed. Its decisions do not require ratification by the executive branch, not even the president of the U.S.
Despite its independence, the Fed is under so much political pressure since the authorities are striving to pursue unreasonably expansionary monetary policies with the aim to lower unemployment in the short run. The authorities are also determined to control the economy by interfering with Fed’s undertakings.
Fed protects itself from political pressure by setting its own goals and making discretion over the monetary policies to use in pursuit of legislative objectives. Moreover, it works through its structure of checks and balances guaranteeing that certain individuals do not dominate the body’s decisions.
Through OMO, the Fed increases money supply by purchasing repos and securities leading to an increase in reserve balances. This is followed by a decrease in interest rates, and banks start playing the role of lending money to the public at lower rates thus more people access loans.
Fed affects money supply using 4 tools namely; OMO, reserve requirements, discount rate, and alteration of interest rate on bank’s reserve balances. OMO is mostly used as it is very flexible, and its administration quickly leads to the attainment of the monetary objectives.