In the United States, the Federal Reserve’s monetary policy has a significant influence on the representatives of all social groups. The goals of monetary policy include increasing the government’s ability to maximize employment, thus enabling more people to contribute to the economy. This essay is aimed at discussing the types of monetary policies and other problems peculiar to the banking industry.
Effective monetary policies are inextricably connected with achieving the stability of prices and the creation of conditions for appropriate economic development. Continuing on such policies’ goals, the Federal Reserve implements policy decisions to achieve moderate long-term interest rates (Federal Reserve Education, n.d.). With that in mind, monetary policy conducted in the United States and any other country is aimed at promoting stability in different aspects of the economic situation.
In recessionary periods, when the economy experiences a decline for a few months, the Federal Reserve can resort to expansionary monetary policy decisions to increase the supply of financial resources. As for the essence of expansionary moves, the Federal Reserve utilizes monetary policy tools, such as the discount rates, reserve requirements, and operations with securities in the open market in order to stimulate the economic system (Federal Reserve Education, n.d.).
Expansionary strategies are geared towards achieving lower interest rates, increases in aggregate demand, and so on. The most common aspect of expansionary monetary policies is decreasing the nation’s interest rates to create the additional money supply as a result of providing market players with access to financial resources (O’Connell, 2019). At the same time, due to the lowering of interest rates, expansionary decisions temporarily weaken the nation’s currency, thus increasing the affordability of conducting business activities in the country (O’Connell, 2019).
Importantly, the success of expansionary monetary policies depends on commercial banks’ willingness to make loans. For instance, between 2007 and 2009, the Federal Reserve prime interest rate decreased more than twofold, but lending by banks remained insufficient to produce economic growth (McConnell et al., 2014). Expansionary policies cause increases in consumer spending by offering more attractive lending options and enabling businesses to expand and hire new staff (Amadeo, 2019).
In their turn, restrictive monetary policies are implemented to deal with the negative effects of inflationary periods and prevent the exacerbation of the situation. In response to the problem of high inflation, the Federal Reserve resorts to restrictive policies, including open market operations to sell bonds, raising the discount rate, and increasing the cash reserve ratio (McConnell et al., 2014). As a result of these changes, banks are urged to avoid issuing new loans, thus contributing to decreases in the money supply (McConnell et al., 2014). In the interconnected economic system, negative changes in the money supply affect interest rates and investment spending, eventually lowering the aggregate demand.
Continuing on the problems related to the banking industry, attention must be paid to the Federal Reserve’s current priorities. Jerome Powell considers the current economic conditions to be “generally good,” and expresses commitment to achieving 2% inflation and supporting further expansion by means of using monetary policy to increase labor force participation in the United States (Cox, 2019, para. 6).
Based on his official statements, Powell is concerned about selecting the best policies to promote wage growth even though the labor force participation rate continues to rise (Cox, 2019). To some extent, an emphasis that Powell places on policies to promote wage growth matches the direction taken by his predecessor, Janet Yellen. As a Federal Reserve Chair, she succeeded at decreasing the levels of unemployment and keeping inflation rates low to maintain stability (Stewart, 2018). Today, Powell seems to focus on maintaining his predecessor’s achievements.
Bank mergers or different banks’ decisions to become one organization have both benefits and disadvantages. In 2008, during the period of economic recession, Wells-Fargo acquired Wachovia to save it from collapse (Rothacker, 2018).
Although Wells-Fargo is facing some financial problems nowadays, its reputation and performance were appropriate for almost a decade after the merger. Many argue that Wachovia would never survive as an independent organization due to the limited access to TARP funding or the government’s willingness to help other banks (Rothacker, 2018). Therefore, the discussed case highlights the government’s inability to provide financial assistance to all banks facing problems.
The TARP bailout program mentioned above is an example of how the government attempts to help companies in the financial services industry to overcome temporary financial issues. Despite local advantages and achievements associated with the program’s implementation, efforts within the frame of the TARP also reinforced some political obstacles and could give way to favoritism (Calomiris & Khan, 2015).
The idea to provide financial assistance to banks in order to maintain stability definitely deserves attention. At the same time, the principles upon which the TARP program is built may need to be reconsidered to optimize costs and eliminate opportunities for corruption and fraud. As for the future of banking, with reference to the problems listed above, many companies in the industry will be likely to face problems resulting from corruption and the ineffective use of bailout funds.
To sum up, monetary policy belongs to the key tools that central banks utilize to contribute to economic stability by keeping inflation at an appropriate level. In general, effective monetary policies can be listed among the basic prerequisites to societies’ and economic systems’ well-being and development. Using open market operations, reserve requirements, and discount rates as specific tools, the Federal Reserve implements expansionary or recessionary policies depending on current economic tendencies.
Amadeo, K. (2019). Expansionary monetary policy. The Balance. Web.
Calomiris, C. W., & Khan, U. (2015). An assessment of TARP assistance to financial institutions. Journal of Economic Perspectives, 29(2), 53-80.
Cox, J. (2019). Powell says the Fed is ‘strongly committed’ to 2% inflation goal, a sign that rates are likely to hold steady. CNBC. Web.
Federal Reserve Education. (n.d.). Monetary policy basics. Web.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2014). Economics: Principles, problems, and policies. New York, NY: McGraw-Hill Education.
O’Connell, B. (2019). What is expansionary monetary policy? The Street. Web.
Rothacker, R. (2018). Wells Fargo has its own troubles 10 years after saving Wachovia. Some wonder: What if? Charlotte Observer. Web.
Stewart, E. (2018). Janet Yellen, the first woman Fed chair, proved the skeptics wrong and got fired anyway. VOX. Web.