Go To FRB Press Release FOMC Statement December 16, 2009

Go To Frb Press Releasefomc Statementdecember 16 2009you Should

Go to “ FRB: Press Release—FOMC statement—December 16, 2009 .†You should now find a press release from the Board of Governors of the Federal Reserve System, dated December 16, 2009, which discusses the decisions of the Federal Open Market Committee (FOMC) for that date. This release also states that the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. Additionally, the release states that the FOMC has decided to gradually reduce “the pace†of such Fed purchases. Discuss why you believe that the FOMC has made such a decision, and explain the consequences of such a decision on the economy. In your answer, discuss the Federal Reserve’s use of open-market operations to influence the money supply and the respective consequences of such actions.

Include a discussion of the money multiplier effect in your response. Justify your conclusions and provide appropriate examples. Using Microsoft Word, submit your responses in the form of a short paper (1 ½ - 2 pages).

Paper For Above instruction

The decision by the Federal Open Market Committee (FOMC) on December 16, 2009, to gradually reduce the pace of its large-scale asset purchases was a strategic move aimed at transitioning the economy from an emergency phase of monetary easing toward a more sustainable growth path. During the 2008-2009 financial crisis and subsequent recession, the Federal Reserve implemented an aggressive policy of quantitative easing (QE), purchasing extensive amounts of agency mortgage-backed securities (MBS) and government agency debt to inject liquidity into the economy. By December 2009, the primary objective was to support economic recovery without creating excessive inflation or destabilizing financial markets. Therefore, the FOMC's decision to slow these purchases reflected confidence that the economy was gaining momentum, but that it still required support to ensure a stable recovery.

The FOMC’s policy of large-scale asset purchases, primarily through open-market operations, significantly expanded the monetary base. The Fed’s purchase of $1.25 trillion of agency MBS and $175 billion of agency debt increased bank reserves and aimed to lower long-term interest rates, stimulate borrowing, and encourage investment and consumption. Open-market operations involve the central bank buying or selling government securities to influence liquidity and the money supply. When the Fed buys securities, it credits banks’ reserve accounts, effectively increasing the amount of reserves in the banking system. This, in turn, influences the overall money supply through the money multiplier effect, where banks can lend multiple times the reserves they hold, thus amplifying the impact on the economy.

The reduction in the pace of asset purchases signals an attempt by the FOMC to gradually taper these extraordinary measures, hoping to prevent asset bubbles or runaway inflation while maintaining economic growth. This tapering reflects the FOMC’s confidence in the economy’s resilience; however, it also presents risks. If the Fed withdraws monetary support too quickly, it could hamper recovery efforts, leading to higher unemployment or stagnation. Conversely, maintaining excessive stimulus may risk inflation, which erodes purchasing power and destabilizes markets.

The money multiplier effect plays a vital role in understanding the consequences of the FOMC’s policies. Theoretically, an increase in reserves leads to a multiplied rise in the broader money supply. For example, if the reserve ratio remains at 10%, a $100 billion increase in reserves can potentially support up to $1 trillion in broader deposits and currency through multiple rounds of lending. However, during economic uncertainty, banks tend to hold excess reserves rather than lend them out, diminishing the multiplier’s effect. Conversely, a reduction in the Fed’s purchases could tighten liquidity, potentially contracting the money supply and slowing economic activity.

In conclusion, the FOMC’s decision to gradually reduce asset purchases during December 2009 was driven by the need to balance supporting economic recovery with avoiding the risks of inflation or financial instability. Through open-market operations, the Fed influences the money supply and, via the money multiplier, affects broader economic conditions. The careful tapering aimed to ensure sustainable growth while preventing overheating, illustrating the delicate balance policymakers must strike in managing monetary policy in challenging economic circumstances.

References

• Bernanke, B. S. (2010). The State of Monetary Policy. Speech at the Milton Friedman Institute, University of Chicago.
• Federal Reserve Board. (2009). FOMC Monetary Policy Statement, December 16, 2009. https://www.federalreserve.gov/newsevents/pressreleases/monetary20091216a.htm
• Gagnon, J., Raskin, M., Remache, J., & Sack, B. (2011). Large-Scale Asset Purchases by the Federal Reserve: Did They Work? Federal Reserve Bank of New York Staff Report No. 543.
• Krugman, P. (2010). The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company.
• Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets. Pearson.
• Rogoff, K. (2010). The Return of Balance Sheet Recessions. NBER Working Paper No. 16583.
• Schularick, M., & Taylor, A. M. (2012). Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870–2008. American Economic Review, 102(2), 1029-1061.
• United States Federal Reserve. (2010). The Federal Reserve’s Response to the Financial Crisis. https://www.federalreserve.gov/monetarypolicy/fomcminutes20101216.htm
• Wallace, N. (2011). Quantitative Easing and Its Effectiveness. Journal of Economic Perspectives, 25(4), 137–150.
• Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton University Press.