Money Banking and Financial Institutions

Part 1

The statement reflects the FOMC's views on the economy in many ways and provides a justification for its monetary policy decisions. One of the key ways is the Fed's responsibility in developing the federal funds' target rates. That includes the interest rates the banks are expected to charge one another for overnight loans. Therefore, the federal funds' target rates are used as a benchmark for determining the short-term interest rates, including the ones used for savings accounts and the short-term bonds. The target rate is also used in determining the basis for the prime rate (Bordo & Istrefi, 2018). Based on FOMC's views on the economy, the Fed is expected to use the federal funds' target rate as one of the key approaches in influencing the economy.    

The statement provides a justification for FOMC's monetary policy decisions on how it stimulates the growth of the economy by lowering the target rate. Reducing the interest rates means that the consumers will borrow more and increase their expenditure. Lowering the interest rate will most likely weaken the dollar value, unlike other currencies. That approach will consequently encourage the consumers to purchase locally made goods since foreign goods will become costlier. Such an increase in demand will consequently result in an increase in employment and wage. 

Part 2

One of the most significant quantitative easing arguments is that the Central Banks should increase the supply of money through buying government bonds and any other securities. That is mainly because an increased supply of money plays a key role in lowering the interest rates (Dow, 2019). Once the central banks have lowered the interest rate, the banks can now increase lending with easier terms. The implementation of quantitative easing normally takes place when the interest rates are almost zero, mainly because of how the central banks have reduced the number of tools of influencing economic growth.

However, when there is low effectiveness in quantitative easing, the fiscal policies developed by the government can be used in expanding the money supply. Quantitative easing as a method can as well be a combination of both monetary and fiscal policy. For example, once a government purchases assets that are believed to be long-term government bonds, that can be a key approach to financing counter-cyclical deficit spending. Nevertheless, although most of the central banks have been formed to conduct a regulatory oversight, they cannot influence the lending activities of the banks within the respective countries. On the other hand, an increase in money supply by the central banks can result to inflation.