Wednesday, July 8, 2009

the importance of monetary policy

Not only is monetary policy the most important function of the fed, it is probably the most used policy in macroeconomics. The fed conducts and controls monetary policy, whereas fiscal policy is conducted directly by the government. Both policies are directed toward the same: influencing the level of aggregate economic activity, hopefully in a beneficial manner. (In many other countries institutional arrangements are different; the central bank is a part of government, so both monetary and fiscal policy is directly conducted by the government, albeit by different branches of government.)
Actual decisions about monetary policy are made by the Federal open market Committee (FOMC), the fed's chief policy making body. All seven members of the board of governors, together with the president of the New York fed and a rotating group of four of the presidents of the other regional banks, vote on the FOMC. All 12 regional bank presidents attend and can speak at FOMC meetings. The financial press and business community follow their discussion closely. There are even Fed watchers whose sole occupation is to follow what the fed is doing and to tell people what it will likely do.

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