Course work in macroeconomics

2.1 Monetary policy in the USA

Monetary policy in the United States comprises the Federal Reserve's actions and communications to promote maximum employment, stable prices, and moderate long-term interest rates. The three economic goals the Congress has instructed the Federal Reserve to pursue. (Figure 1)

The Federal Reserve conducts the nation's monetary policy by managing the level of short-term interest rates and influencing the overall availability and cost of credit in the economy. Monetary policy directly affects short-term interest rates, it indirectly affects longer-term interest rates, currency exchange rates, and prices of equities and other assets and thus wealth. Through these channels, monetary policy influences household spending, business investment, production, employment, and inflation in the United States.
Figure 1. The Federal Reserve’s statutory mandate The Federal Reserve conducts monetary policy in pursuit of three goals set for it by Congress. The three mandated goals are considered essential to a well-functioning economy for consumers and businesses.²



Mandate

1. Maximum employment

2. Stable prices

3. Moderate long-term interest rates

Traditional monetary policy

Nontraditional monetary policy



Open market operations

Infl­uence supply of balances in the federal funds market, supply of money and credit in the economy

Reserve requirements

Infl­uence demand for balances in the federal funds market, supply of money and credit in the economy

Discount window lending

Infl­uences supply of balances in the federal funds market, supply of money and credit in the economy

Forward guidance

Helps the public better understand policy makers’ intentions about the future course of monetary policy

Large-scale asset purchases

Provide additional stimulus to interest-sensitive spending, affect the economy through the same channels as traditional monetary policy