The Federal Reserve is preconditioned to monitor and assess market developments in financial markets. It exercises some degree of control over the market forces driving economic indicators in favor of economic stability and growth. The Federal Reserve influences money market through open market operations that involves purchase and sale of government securities that results in an increase or decrease of bank reserves and the banks’ ability to make loans.
The increase or decrease in loans by banks has a direct impact on the country’s money supply that in turn affects the interest rates. The chain of economic growth and stability is impacted by the use of such open market operations and monetary policies. The measures adopted by the institution to balance economic trends discussed in the previous section highlights the impact on the specific market forces. It is evident that the Federal Reserve can influence the economic growth of the country to a considerable extent.
But it does have its limitations. The monetary policies adopted by the system can have wider impact in the short term. It can provide the necessary stimulus to propel market forces towards creation of more employment opportunities in the short term, but in the long run these monetary policies will not have such far-reaching results. This is due to the fact the unemployment trends in the economy are driven by a number of factors that are beyond the reach of the influence of the monetary policies.
Changes in technological front have considerable influence over employment trends besides the effect of people preferences. The other limitation of the monetary policy is that it cannot be used to boost specific industries or geographic areas. The present economic situation is a depressed economic growth with increased unemployment. The Federal Open Market Committee lowered its target for the federal funds rate to 3 percent in January 2008.
This was to give the economy a slight boost from the downward trend and tightening of credit. The consumer price index decreased by 6. 7 percent in December 2007 with unemployment rising by 5 percent. In view of the recent monetary policies adopted to neutralize the economic imbalances the effects have not been very effective but this might change in the long run. The limitations of the monetary policies have given short-term benefits to the economic slump in the US market.