A recession and the role of the Federal Open Market Committee
A recession is described as a significant deterioration of a country's economic activities that typically lasts several months. Changes in real income, industrial production, employment, wholesale and retail sales, and the country's GDP are typical indicators. A recession usually begins after a period of economic apex. Following economic expansions, the economy enters a trough after reaching its peak. Yet, recessions are short-lived. This study will examine the Federal Open Market Committee as a Federal arm employed to handle recession-related concerns. The Federal Open Market Committee (FOMC) is the core body of the Fed which is used in developing and implementing monetary policies. The core role of FOMC is to conduct open market actions which are aimed at attaining a desired rate of interest. Fiscal policies are the actions of the central bank whose primary objective is to manage the availability and overall cost of capital and credit and can be applied by the country in its attempt to overcome a recession. These actions are taken to help the state in achieving its economic objectives (Board of Governors of the Federal Reserve System, 2017).
Monetary Policy Tools
The fed has the responsibility of managing the availability and cost of money in the American economy. At its disposal, it has three primary tools for controlling monetary flow. The first alternative is the Open Market operations. These activities involve the purchase and sale of public securities. These securities are sold or bought from the public or the private banks within the country. The Fed often buys these securities to increase the amount of money circulating in the economy while it sells the securities to reduce the volume of money flowing. During a recession, the government will sell such securities. Secondly, the Fed can apply the tool of bank reserve requirement to counter a recession. The bank reserves refer to the minimum amount of funds that banks are expected to hold overnight. Banks will A contractionary monetary policy will require high reserves while low reserves requirements are seen as an expansionary monetary policy. Banks will often adjust their lending rates to cope with the demands. Depending on the applied policy, banks will lower lending rates to encourage borrowing or increase the lending rates to promote savings by the public and private entities. During a recession, the Fed reduces the reserve requirements hence creating an expansionary policy. The third tool is the discount rate. It refers to the rate at which the Fed lends to the banks at a discount window. A higher discount limits borrowing thus effecting a contractionary policy and the vice versa is true. During a recession, the discount rate is often reduced (Amadeo, 2017).
Focus on the Open-market operations (OMO)
In dealing with OMO, the FOMC often engages its member banks in the purchase or sale of government backed securities such as treasury bills, bonds, notes or the mortgage backed instruments. This is the core tool used by the Fed in controlling increasing or decreasing the rates of interest. These OMO operations can either be permanent or temporary depending on the long-term objective. To increase the rate of interest, the FOMC will sell monetary instruments to the banks to reduce the amount of amount available for circulation. This is termed as a contractionary monetary policy. It tends to slow the rate of economic development as well as reducing the inflation rate experienced. By selling the securities, bank reserves are diminished such that the amount available for lending declines. On the other hand, an expansionary monetary policy will see the FOMC purchase the securities to release more cash to the economy. The primary objective of this approach is to stimulate the growth of the economy while at the same time increasing employment levels. As applied during the 2008 financial crisis, the FOMC can implement the quantitative easing program which involves the purchase of assets. This provided more cash flow to banks which they could lend out for profitability (Amadeo, Open Market Operations: How the Federal Reserve Asset Purchase Program Works, 2017).
Effects of Purchase of the US Treasury Bonds by Foreign Central Banks
For a foreign country to buy or sell foreign treasury bonds, the target effect is to protect its economy. As such, when an overseas central bank purchases the American treasury instruments, our economy is not impacted unless when such funds involved are drawn from the public or injected back to the public. Once an external Central bank acquires such securities, they can only be sold to another party who will purchase it regarding the US dollar (Muhammad, 2014).
Effects of A Recession to Individuals
With a recession, people are likely to suffer from the decline in available job opportunities. This is because government efforts will be focused on withdrawing money from the economy. As a result, this disrupts the economic development and translates to unemployment. Similarly, with monetary policies which mop up funds from the economy, it likely that citizens will not be able to easily access credit and if they do, it will be at a high cost. As a student, financing private studies will also be a challenge due to the high cost of obtaining funds. Also, any planned investment is impossible due to the scarcity of resources required to invest in meaningful opportunities that generate reasonable profits (Quilty).
References
Amadeo, K. (2017, June 10). Monetary Policy Tools: How They Work. Retrieved from http://www.thebalance.com/monetary-policy-toos-how-they-work-3306129
Amadeo, K. (2017, June 15). Open Market Operations: How the Federal Reserve Asset Purchase Program Works. Retrieved from http://www.thebalance.com/open-market-operations-3306121
Board of Governors of the Federal Reserve System. (2017, July 26). Federal Open Market Committee. Retrieved from http:federalreserve.gov/monetarypolicy/fomc.html
Muhammad, C. (2014, January 16). So What ifChina has $1.32 Trillion in U.S Treasuries? It still Can't Crash America's Economy. Retrieved September 2017, 2017, from http://forbes.com/sites/cedricmuhammad/2014/01/16/so-what-if-china-has-1-32-trillion-in-u-s-treasuries-it-still-cant-crash-americas-economy/?trending#5813e41f1365
Quilty, D. (n.d.). 9 Effects of the Recession on Families andHow to Cope. Retrieved September 7, 2017, from http://www.moneycrashers.com/effects-recession-families/
