Hi! Thanks for the very interesting question.
The article on the Federal Reserve of San Francisco website on the
Federal Reserve provides a basic look on how such policy are made and
the strategies that go with it. To save you time I shall provide
quotes from the article which is directly relevant to your question
and you can read from there.
“Monetary policy has two basic goals: to promote "maximum" output and
employment and to promote "stable" prices. These goals are prescribed
in a 1977 amendment to the Federal Reserve Act.”
*About Maximum Output and Employment:
“In the long run, the level of output and employment in the economy
depends on factors other than monetary policy. These include
technology and people's preferences for saving, risk, and work effort.
So, "maximum" employment and output means the levels consistent with
these factors in the long run.
But the economy goes through business cycles in which output and
employment are above or below their long-run levels. Even though
monetary policy can't affect either output or employment in the long
run, it can affect them in the short run. For example, when demand
contracts and there's a recession, the Fed can stimulate the
economy—temporarily—and help push it back toward its long-run level of
output by lowering interest rates. Therefore, in the short run, the
Fed and many other central banks are concerned with stabilizing the
economy—that is, smoothing out the peaks and valleys in output and
employment around their long-run growth paths.”
*About Stable Prices
High Inflation which is when prices become unstable hinders economic
growth in two ways:
1. “…when inflation is high, it also tends to vary a lot, and that
makes people uncertain about what inflation will be in the future.”
2. “…because many aspects of the tax system are not indexed to
inflation, high inflation distorts economic decisions by arbitrarily
increasing or decreasing after-tax rates of return to different kinds
of economic activities. In addition, it leads people to spend time and
resources hedging against inflation instead of pursuing more
productive activities.”
U.S. Monetary Policy: An Introduction page 2
http://www.frbsf.org/publications/federalreserve/monetary/goals.html
The FED uses indirect tools to influence the factors mentioned above.
“The Fed can't control inflation or influence output and employment
directly; instead, it affects them indirectly, mainly by raising or
lowering short-term interest rates. The Fed affects interest rates
mainly through open market operations and the discount rate, and both
of these methods work through the market for bank reserves, known as
the federal funds market.”
U.S. Monetary Policy: An Introduction page 3
http://www.frbsf.org/publications/federalreserve/monetary/tools.html
And now on the way the FED makes a monetary policy strategy:
“The Fed looks at a whole range of indicators of the future course of
output, employment, and inflation. Among the indicators are measures
of the money supply, real interest rates, the unemployment rate,
nominal and real GDP growth, commodity prices, exchange rates, various
interest rate spreads (including the term structure of interest
rates), and inflation expectations surveys. Economic forecasting
models help give structure to understanding the interplay of these
indicators and policy actions. But these models are far from
perfect—so policymakers rely on their own less formal judgments about
indicators as well.
Indeed, policymakers often disagree about how important one indicator
is rather than another—and this isn't surprising, because the
indicators can be hard to interpret, and they can even give
contradictory signals.”
U.S. Monetary Policy: An Introduction page 5
http://www.frbsf.org/publications/federalreserve/monetary/formulate.html
The following articles might be of interest to you since it gives a
greater detail of discussion on the questions of its policies:
“Despite its imperfections, monetary policy has several advantages
over the two alternative types of stabilizers—fiscal policy and direct
controls (price controls and rationing).
• First, it is highly impersonal. Monetary policy interferes very
little with the freedom of the market, although market imperfections
sometimes intensify the effects of policy upon particular sectors of
the economy.
• Second, monetary policy is flexible. The Federal Open Market
Committee usually meets about every six weeks, reaches a decision, and
acts on that decision immediately.
• Finally, and perhaps most important, Congress has carefully
insulated the Federal Reserve from day-to-day political pressures so
it may act in the best interests of the country. Congress wisely
spread the policymaking machinery throughout the System to avoid undue
concentration of power. “
A criticism of the FED and its popular leader Alan Greenspan:
Greenspan's halo dims with economy
By David R. Francis
http://www.csmonitor.com/durable/2001/03/16/fp1s2-csm.shtml
Using Monetary Policy Rules in Emerging Market Economies *
By John B. Taylor Stanford University (December 2000)
http://www.stanford.edu/~johntayl/Papers/Bank%20of%20Mexico%20Paper2.pdf
Search terms used:
FED monetary policy criticism
I hope this is what you were looking for. Please ask for a
clarification if you have a question or if you would need further
information!
Regards,
Easterangel-ga |
