Charles Osgood, radio and television journalist, explains the Federal Reserve monetary policy.
MACROECONOMIC POLICY
The federal government aims to promote the conditions required for steady
economic expansion and high levels of employment, especially a stable general
price level and a tolerable tax burden. The Federal Reserve, the independent
U.S. central bank, manages the money supply and use of credit (monetary policy),
while the president and Congress adjust federal spending and taxes (fiscal
policy).
Since the inflation of the 1970s, Federal Reserve monetary policy has
emphasized preventing rapid escalation of general price levels. When the general
price level is rising too fast, the Federal Reserve acts to slow economic
expansion by reducing the money supply, thus raising short-term interest rates.
When the economy is slowing down too fast, or contracting, the Federal
Reserve increases the money supply, thus lowering short-term interest rates. The
most common way it effects these changes in interest rates, called open-market
operations, is by buying and selling government securities among a small group
of major banks and bond dealers.
A particularly tricky situation for monetary policy makers, called
stagflation, occurs when the economy is slowing down and inflation is rising too
fast.
The usefulness of fiscal policy has been subjected to intense academic and
political debate. Some people view even massive additional government spending
as too small to make any difference in the huge U.S. economy, although specific
projects can have locally important effects. Some experts emphasize benefits to
the economy from low tax rates; others emphasize harm to the economy from
government borrowing.
