09 Jul The Federal Reserve
The Federal Reserve increases and contracts the money supply in the United States by enacting policies that largely affect interest rates. An increased money supply results in lower interest rates, allowing for broader lending to seasoned and new borrowers. A decreased money supply increases interest rates and restricts new lending to only the most assured borrowers. In 1977 the dual mandate was enacted and is a congressional directive that the Federal Reserve’s highest priorities should be full employment and price stability (McConnel et. al, 2021). The Federal Reserve relies on bond and securities markets to (1) determine the health of the economy and (2) determine its course of action to meet the dual mandate requirements. The Fed also employs a reverse ratio to influence the lending abilities of commercial banks. The reverse ratio is “the fraction of checkable deposits that each commercial bank or thrift institution must hold as reserves at its local Federal Reserve Bank or in its own bank vault; also called the reserve requirement” (McConnel et. al, 2021). Expansionary monetary policy shifts the money supply curve rightward and conversely, restrictive monetary policy shifts the curve leftward. Currently, the Federal Reserve is in a state of restrictive monetary policy due to the currently high rates of inflation. I personally think the Fed’s current actions are conservative and recently, the current Federal Reserve chair Jerome Powell outrageously suggested wages should be frozen and are growing too fast – “But the increases are running at levels that are well above what would be consistent with our 2% inflation goal over time” (Powell, 2022). The minimum wage was last raised in the United States in 2009 and since wages have stagnated. Raising the minimum wage would move more funds through the economy and in turn, allow banks a broader range of borrowers for new lending.
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