The economic and financial system in US is facing grave challenges and the economy is presented with severe uncertainties that can result in huge implications on all aspects of economic growth. The Federal Reserve faces stiff challenges in controlling the market forces to contain the economic imbalances and financial upheaval in the economy. The rising inflation, increasing unemployment, and current economic instability have posed immense challenges to the Federal Reserve. The system now needs to review and re-design some of its policies and regulations to accommodate changing global economics.
As per Timothy Geithner, the President and CEO of Federal Reserve Bank of New York observes that “institutions that are banks, or are built around banks, with special access to safety net, need to be subject to a stronger form of consolidated supervision than our current framework provides”. Increasing risks and volatility in the financial market has also provided tough challenges for the Federal Reserve in controlling the capital reserves, interest rates, and liquidity position in the market.
The financial institutions need to be cushioned against this increasingly sensitive capital market. This will ensure that the banks and other financial institutions act as stabilizing forces in response to fluctuating financial markets. The same applies to the consumer market as well where application of strong operational infrastructure and high-end technology innovation can meet increased market demand. Current economic conditions and role of Federal Reserve
The US economy is facing severe financial crisis in the light of falling GDP (Gross Domestic Product) and rising inflation. The weakening of the dollar as opposed to other currencies across the globe has presented immense challenges to the controlling institutions like Federal Reserve. The system cut the federal funds rate down to 2. 25 percent but this did not have the desired impact on the economic growth drivers. The economic perspective can be observed from three critical elements that have strongly impacted the country’s financial markets –
• The rising prices of food, oil, and other consumer goods • The slump in the housing market sector • Severe crisis in the credit market The rising inflation is accountable to the increased oil prices that have influenced price rise in all other commodities. The savings market has taken a downward plunge in the face of this rising inflation and the value of dollar has dropped in comparison to other currencies across the globe. The Federal Reserve cut the federal funds rate recently to combat these market forces and improve liquidity position.
This did have significant impact on the market that have slowly started showing positive trends in the last few months. References: 1. Alan H. Meltzer (2004) – A history of Federal Reserve Volume 1, University of Chicago Press 2. Ronald McKinnon (April 25, 2008) – Bagehot’s lessons for the Fed – Wall Street Journal – http://online. wsj. com/article/SB120908336730343529. html? mod=googlenews_wsj – accessed on 24th April, 2008 3. The Federal Reserve System – Purposes and Functions – http://www.
federalreserve. gov/pf/pdf/pf_complete. pdf – accessed on 24th April, 2008 4. About the Federal Reserve – http://www. federalreserve. gov/aboutthefed/default. htm – accessed on 24th April, 2008 5. FRBSF – Economic Letter – http://www. frbsf. org/publications/economics/letter/2008/el2008-13-14. html – accessed on 24th April, 2008 6. The Federal Reserve Board – Remarks by Chairman Alan Greenspan – http://www. federalreserve. gov/boarddocs/speeches/2005/20051114/default. htm – accessed on 24th April, 2008
7. A case study: the Federal Reserve System and monetary policy – http://www. econedlink. org/lessons/index. cfm? lesson=EM753&page=teacher – accessed on 24th April, 2008 8. The role of Federal Reserve in the economy – http://www. frbsf. org/news/speeches/2002/021113. pdf – accessed on 24th April, 2008 9. The current financial challenges – policy and regulatory implications – http://www. newyorkfed. org/newsevents/speeches/2008/gei080306. html – accessed on 24th April, 2008