Fiscal Policy
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, In the past, the countrys economic policy had been defined by the Employment Act of 1946, which encouraged the federal government to pursue “maximum employment, production, and purchasing power” through cooperation with private enterprise.
Congress encouraged the government to develop a sound monetary policy, controlling inflation and pushing toward full employment by managing the amount and liquidity of currency in circulation.
The main tasks of the Federal Reserve are:
Supervise and regulate banks
Implement monetary policy by open market operations, setting the discount rate, and setting the reserve ratio
Maintain a strong payments system
Control the amount of currency that is made and destroyed on a day to day basis
The Federal Reserve is comprised of a board of governors. The 7 members of the board are appointed by the President and confirmed by the Senate. Members are elected to terms of 14 years, with the ability to serve for no more than one term.
The Federal Reserve implements monetary policy largely by attempting to steer the federal funds rate, also called the overnight rate. This is the rate that banks charge each other for overnight loans of federal funds. The Federal Reserve Board affects the federal funds rate by using open market operations, which is the purchase and sale of Treasury securities. If it wants to inject money into the economy, then it buys bonds, which also lowers interest rates. If it wants to lower the money supply, it sells bonds, which raises interest rates.
The Federal Reserve can also directly set the discount rate, which is the interest rate that banks pay the Fed to borrow from it. However, banks tend to prefer to borrow from each other than directly from the Fed. The discount rate is often higher than the fed funds rate, and it can also attract heightened regulatory scrutiny of the borrowing bank.
The Federal Reserve usually adjusts the federal funds rate by 0.25 or 0.50 percentage points at a time. From early 2001 to mid 2003 the Federal Reserve lowered its interest rates 13 times, from 6.25 to 1.00 percent, to fight recession. In November 2002, rates were cut to 1.75, and many interest rates went below the inflation rate. (This is known as a negative interest rate, because money paid back from a loan with an interest rate less than inflation is worth less than its original value.) On June 25, 2003, the federal funds rate was lowered to 1.00 percent
Fiscal Policy is the economic term which describes the behavior of governments in raising money to fund current spending and investment for collective social purposes and for transfer payments to citizens and residents of the territory for which the government is responsible. The