Fed's Operating Procedure
What were the strengths and weaknesses of the Fed's operating procedures that were used after October 6, 1979?
In 1979, two factors impacted inflation. The oil shock resulted in prices spiraling out of control. With higher production costs, the companies have to maintain profits margins by increasing prices to consumers (inflation). In addition, the weakness of the US dollar aggravated inflationary pressures as well. The weak dollars results in rising of the price of imports and reducing the price of exports. The overall exports increases since US goods are relatively inexpensive. This in turn raises demand and increases inflation. In order to control inflationary pressures, the Fed put in policies that reduced the money supply.
In 1979, …show more content…
If Volcker's decisions are too aggressive, a recession could result. With high interest rates, borrowing money becomes expensive. People are not tempted buy things, therefore this result in a drop in demand. Then the supply of goods becomes high and production has to decreases due to a lower demand. When production decreases, the demand for labor decreases (unemployment increases) and a recession results.
In addition, another negative part of high interest rates is the impact on the bond market. As interest rates increased, the bond value dramatically dropped causing financial hardship on the financial institutions that bought the bonds.
What were the consequences of deregulation for the conduct of monetary policy?
Deregulation leveled the playing field for depository institutions, whether they were Federal Reserve Bank members or not. Deregulation allowed the Fed to have more control over the money supply and therefore more impact on country's inflation. Soon after deregulation, a sharp recession hit. Monetary policies were impacting real output. GNP dropped, unemployment rose, and money growth declined. Deregulation along with all the existing monetary policies, such as credit controls, resulted in the
In 1979, two factors impacted inflation. The oil shock resulted in prices spiraling out of control. With higher production costs, the companies have to maintain profits margins by increasing prices to consumers (inflation). In addition, the weakness of the US dollar aggravated inflationary pressures as well. The weak dollars results in rising of the price of imports and reducing the price of exports. The overall exports increases since US goods are relatively inexpensive. This in turn raises demand and increases inflation. In order to control inflationary pressures, the Fed put in policies that reduced the money supply.
In 1979, …show more content…
If Volcker's decisions are too aggressive, a recession could result. With high interest rates, borrowing money becomes expensive. People are not tempted buy things, therefore this result in a drop in demand. Then the supply of goods becomes high and production has to decreases due to a lower demand. When production decreases, the demand for labor decreases (unemployment increases) and a recession results.
In addition, another negative part of high interest rates is the impact on the bond market. As interest rates increased, the bond value dramatically dropped causing financial hardship on the financial institutions that bought the bonds.
What were the consequences of deregulation for the conduct of monetary policy?
Deregulation leveled the playing field for depository institutions, whether they were Federal Reserve Bank members or not. Deregulation allowed the Fed to have more control over the money supply and therefore more impact on country's inflation. Soon after deregulation, a sharp recession hit. Monetary policies were impacting real output. GNP dropped, unemployment rose, and money growth declined. Deregulation along with all the existing monetary policies, such as credit controls, resulted in the