Monetary policy

Essay by tjantik June 2006

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What is monetary policy?

Monetary Policy is the regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. This policy influences the borrowing and spending of loan. The objective for monetary policy is to try and establish economic growth with stable prices.

The United States monetary policy affects not only all kinds of economic and financial decisions which are like applying a loan to buy a house, an automobile, to start business, or putting savings in a bank, buying bonds or stocks but also other countries' monetary policy. The government attempts to influence the overall level of economic activity in line with its political objectives.

Ben S. Bernanke was sworn in on February 1, 2006, as Chairman and a member of the Board of Governors of the Federal Reserve Bank. He serves as Chairman of the Federal Open Market Committee as well.

He seems to succeed the policy of the former Chairman Alan Greenspan, which is to focus on stabilizing the economy and the consumer price. The Federal Reserve System controls inflation or influence output and employment indirectly by raising or lowering interest rates. The Federal Reserve Bank affects interest rates through open market operations and the discount rate. Both of these methods work through the market for bank reserves, known as the federal funds market. Banks hold a specific amount of funds in reserve. These funds are called reserves and banks keep them as cash in their vaults or as deposits.

Federal Reserve Bank Chairman's strategy has a big influence to worlds' monetary market and economy. The influence, which Japan needs to consider, is an interest rate and an exchange rate.

Federal Reserve Bank has been raising the short-term interest rate gradually since June, 2004 in order to stabilize...