Question

Federal Reserve was established in 1913, and so its journey into the uncharted territory of monetary intervention began. What kind of policies to use and to what effect? What kind of tools to implement such policies to choose?

Looking back to the various defining moments (e.g. WWI, Great Depression, WWII and Bretton Woods, high inflation, Fed's dual mandate, global markets, deregulation and credit surge, etc.), how would you comment on the evolution of the monetary policy throughout these times? Name and briefly describe the periods and their defining characteristics or events that in your view shaped the monetary policies of the day.

(Answer in 10 to 15 lines)

Answer 1

Under its monetary policy, the Federal Reserve, regulates the influence of the availability and cost of money and credit to help promote national economic goals.

The various used tools are Open market operations, Discount rate, Reserve requirements

The Federal Reserve faced its first major test during World War I, helping to finance the war by facilitating war bond sales and by providing loans at preferential rates to banks purchasing Treasury certificates. The Fed also took action to bring inflation down following the conflict, emerging from the period better equipped to serve as a central bank.

During the great depression, congressional reforms culminated in the Reconstruction Finance Corporation Act and the Banking Act of 1932. This legislation shifted some of the Federal Reserve’s responsibilities to the Treasury Department and to new federal agencies such as the Reconstruction Finance Corporation and Federal Deposit Insurance Corporation. These agencies dominated monetary and banking policy until the 1950s.

In 2007, losses on mortgage-related financial assets began to cause strains in global financial markets, and in December 2007 the US economy entered a recession. That year several large financial firms experienced financial distress, and many financial markets experienced significant turbulence. In response, the Federal Reserve provided liquidity and support through a range of programs motivated by a desire to improve the functioning of financial markets and institutions, and thereby limit the harm to the US economy. In addition, the financial crisis led to a range of major reforms in banking and financial regulation, congressional legislation that significantly affected the Federal Reserve.