Influence of the Federal Reserve on Global Investments Using three tools, (a) op
ID: 1168735 • Letter: I
Question
Influence of the Federal Reserve on Global Investments
Using three tools, (a) open market operations, (b) discount rate, and (c) reserve requirements, the Federal Reserve influences output and employment. Globalization influences the conduct of monetary policy through its powerful effects on the economic and financial environment in which monetary policy must operate. Global economic integration has left an imprint on the structure of the U.S. economy, which includes changes in patterns of production, employment, trade, and financial flows. In this week, you will examine the influence of the Federal Reserve on global investments
Examine the influence of the Federal Reserve on global investments. Assess whether the increased openness of the U.S. economy has, in some way, affected the ability of the Federal Reserve to meet its congressional mandate to foster price stability and maximum sustainable employment. ??????????????
Explanation / Answer
Fed Reserve is mandated to achieve the price stability and full employment in USA. USA economy has been integrated with world economies. Hence it has also impacted the effectiveness of Fed Reserve in tackling the problem of price stability and unemployment. Fed Reserve uses various tools such as Open market operation and Reserve requirement to achieve its objectives of full employment and price stability but global market always reduces its effectiveness. If the Fed Reduces the policy rates to spur the economy out of recession, the capital of USA direct take flight to developing countries or elsewhere where the rate of interest is high viz a viz US economy. In this way, USA money flows out of US in search of handsome returns. Similarly, if Fed wants to tight the monetary policy by increasing the rate of interest, again foreign capital fly to USA for higher returns. In this way, again Fed objective of stability is compromised.
To sum up, Fed is not able to work effectively in face of globalisation.