Economy- Federal Reserve System

Federal Reserve System (also known as FEDS) is the central banking of the United States. It was created over 1000 years ago, on December 23, 1923. In this post I will be discussing many aspects of the Federal Reserve- such as fiscal policy and how they take this policy into accounting when planning. I will also be discussing the recent inflation and how they will be keeping the inflation in control and much more.

FEDS was created following many financial panics- the enactment of the Federal Reserve Act created this central banking. Let’s look back at the history of the creation of the banking.

In 1907 a financial panic broke out worldwide. It changed a recession into an economic contraction. This established the Federal Reserve System. 

The FED provides the United States with a flexible, reliable and stable financial and monetary system. There are many duties of the FED, the main being following the national monetary policy, regulating banks, maintaining financial stability, managing money supplies and providing many other banking services.

Controlling Inflation

Feds control inflation by increasing the interest rate. The Federal Reserve encourages banks to increase rates on loans etc. Chair Jerome Powell stated that there is likelihood that Federal Reserve will raise interest rates at least once more this year due to the consistent high inflation in the economy’s service sector and unexpected tight job market.

Fiscal Policy-

Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty. The Federal Reserve Bank indirectly target activities by influencing the money supply through changing interest rates and trading of foreign exchange. The econometric models used at the Fed for constructing forecasts tend to summarize fiscal effects in terms of changes in aggregate demand or aggregate supply. For example, a tax cut that influences consumers to spend more, this then increases demand in the market of economy. Fiscal policies also affect aggregate supply, for example, through the incentives provided by the tax code. To project the impact of a proposed fiscal package on the economy, Fed modelers and policymakers must assess the size and timing of these demand and supply effects, which they do based both on theory and historical experience.

Monetary policy-

The monetary policy consists of the Federal Reserve’s communications and actions to gain maximum employment, stable prices and handle long-term interest rates. The Federal Reserve controls the three tools of monetary policy–open market operations, the discount rate, and reserve requirements. United States current monetary policy was set at 4.83 % pa in Apr 2023, compared with 4.83 % pa in the previous Mar 2023. United States policy rate averaged 4.13 % pa and is updated monthly, available from Jul 1954 to Apr 2023. There are limitations of monetary policy in the United States, such as-the Fed are not able to control relative prices, employment, or output however, it can directly control only the monetary base, and this can therefore affect money growth, nominal income, and the average level of money prices.

Pandemic’s effect on rent payment-

The Federal Reserve Bank released their 2023 SCE Housing Survey, which released in April- reported some data about the expected home prices, interest rates, and mortgage refinancing. The data showed a significant drop in home prices. However, owners and renters expect rents to rise significantly this year but at a steadier pace than last year.

Many renters faced crisis in regard to paying their rent during the pandemic – more percentage of renters stated that they have been struggling to pay rent in the months before even though they had a various of Government support including rental assistance and unemployment benefits. When renters were questioned about their rent payments it was stated that before the pandemic only 10 percent of renters stated they had missed a payment, however in 2021 17 percent of renters stated they had been behind on their rent. This shows that the pandemic had a negative effect on renters and owners as they both faced loss.

Support given during the pandemic by the Federal-

The Federal Reserve System provided an extra $600 weekly benefit on top of your regular unemployment insurance if you couldn’t work due to COVID-19. This was known as the Federal Pandemic Unemployment Compensation. The Pandemic Unemployment Assistance program expanded UI eligibility to self-employed workers, freelancers, independent contractors, and part-time workers impacted by the coronavirus pandemic. The Pandemic Emergency Unemployment Compensation program extended UI benefits for an extra 13 weeks.

$31 billion was sent to states by Emergency Rental Assistance to support households in keeping the household going in a proper manner.

During the pandemic many health programs received health support such as COVID-19 testing, vaccination and funding for the public health workforce.

Significant pandemic funding to support income security went to programs to help child care providers cope with pandemic-related costs and gaps in service, through the Child Care and Development Fund and Child Care Stabilization Grants. Other dollars went to school meals, the Supplemental Nutrition Assistance Program, and the Low-Income Housing Home Energy Assistance Program.

Multiple Federal sources provided $800 billion in pandemic aid to states. The Families First Coronavirus Response Act sent a total of $60 billion and $2 billion for unemployment insurance and food assistance.

The Coronavirus Aid, Relief, and Economic Security Act provided $151 billion which were used for 45 programs, with $112 billion for states in the Coronavirus Relief Fund.

The Coronavirus Preparedness and Response Supplemental Appropriations Act provided $878 million to states for crisis response support and laboratory capacity.

These large amounts were made on behalf of the Federal government, and these are meant to be the highest than they have been over the past 15 years. Pandemic aid is in addition to the grants that states normally receive from the federal government, States get roughly one-third of their revenue from the federal government, this then helps to pay for health care, schools, roads, public safety, and many other services.

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