The Federal Reserve System or FED is the US central bank and it publishes a report eight times a year that summarizes the current economic conditions in each of the 12 bank districts. This report is used by the Federal Open Market Committee (FOMC) in determining the monetary policies that will be adopted. Monetary policy tools are changing the reserve requirement, changing the discount rate as well as Open Market Operations. (FOMC, 2008). Currently the US economy has been declining or rather weakened and this is attestation that there are economic strains in the financial markets.
However, it is worth mentioning that the instability is not only in US but also in the world economy. Prices of vital goods have been increasing for instance prices of crude oil and this has had spillover effects on other goods or commodities. The housing effects have also been contracting at continuous rates. The real incomes of most Americans have been declining and this obviously affects the consumer spending. Consumer price inflation has also continued to rise especially due to the fact that the energy as well as food prices have been increasing.
(FOMC, 2008). It is expected that the overall economic performance will decline if the situation at hand persists. All in all, the inflation rates are expected to stabilize if the prices of other commodities become stable and the pressure on the resources remains moderate. The housing industry has been adversely affected by the current conditions. This has been attributed to the challenges affecting the mortgages where there have been increased cases of defaults that have a negative effect on the markets.
Cost of housing has risen sharply as most people with mortgages cannot be able to pay for them. As the prices rise the demand for the housing has declined forcing the industry to reduce the construction of new houses and this makes the industry stagnant. There has also been reduced consumer confidence which has led to reduced investment precipitating reduced economic growth. Without the consumer confidence investors shy away from investing as they are not ready to take the risks and this is not good for any economy.
(FOMC, 2008). Among the monetary policies undertaken recently by Fed in an effort to ensure that there was price stability and employment to the US citizens includes the short term funding markets. There were also the open market operations, adjustment of discount rates and procedures for discount window borrowing and securities lending were the main monetary policies were used. Fed also established a Term Auction Facility that would provide short term credit to sound banks given a variety of collateral.
In an effort of increasing its availability of dollar funds within the areas of its jurisdiction it entered into currency swap arrangements with other central banks. By slicing or rather reducing the impact brought about by financial market disruptions FOMC was able to reduce or rather slice down the target for federal funds. (FOMC, 2008). I would advise FOMC to use its ability to control the Federal Reserve requirement in their next meeting. Federal Reserve requirement refers to the minimum percentage of deposits that banks keeps in reserves thus controlling the amount of liquid that commercial banks have for lending.
By making the reserve requirement above what banks would consider appropriate for their safety it controls the amount of money in supply. When the money in circulation is regulated then inflation can be countered. The money multiplier is critical in facilitating the creation of money supply in the economy. It is importance is in relation to the aggregate money supply in an economy. There have been changes in the financial markets and the importance of the money multiplier in influencing money supply is gradually declining.
Its use has been reduced because it is not very significant as most central banks do not use a fixed multiplier to determine the money supply. Instead monetary base interest rates and the desired amount of credit are used. It is not an effective operational variable. References: Board of Governors of the Federal Reserve System. Federal Open Market Committee FOMC. Monetary Policy. Retrieved on 27th May 2008 from http://www. federalreserve. gov/monetarypolicy/fomc. htm