The global economic crisis that is currently facing countries worldwide was first felt in the summer of 2007 in the United States of America. This has resulted in the aggressive involvement of the Federal Reserve Bank in a bid to reverse the economic downward trend. One of the measures taken by the Federal Reserve is by reducing the rates drastically from five per cent to zero. The Federal Reserve has formulated different policies and guidelines aimed at restoring the liquidity in the financial institutions and foster improved conditions in the financial market. These measures have resulted in the change of the balance sheet of the Federal Reserve (Federal, 2009).
The Federal Reserve has applied the practice of open market operations in a bid to control the markets. This has been characterized by the reduction to near zero target of range in the federal funds. This shows the consistency of various liquidity facilities being offered by the Federal Reserve in the reserve balances. The open market operation has resulted in the increase of reserve balances. An example of the open market operation is when the Federal Reserve thought to buy directly the obligation of Freddie Mac and Fannie Mae.
Another tool that has been used is the swapping of liquidity currencies between the Federal Reserve and other central banks overseas. This has been divided into two classes. The first one is the dollar liquidity lines and then the foreign currency liquidity lines. This has seen the foreign central banks exchanging their currencies with the Federal Reserve on behalf of their banking institutions under their jurisdictions (Federal, 2009).
The Federal Reserve has also applied the lending mechanism of lending to depository institutions. The lending itself is in three categories. These are the primary credit where mostly the credit is given out on a short term basis. For instance, before the economic crisis in 2007, the primary credit duration was overnight. This has since changed as the Federal Reserve sought to establish order in the functioning of the market by reducing the spread between the primary credit rates and target federal funds. It has also increased the number of days to as long as 30 days. Whereas the availability of long term credit, the duration has been raised to 90 days. This is allowed to entities with sound or proper financial base. As a result of this, there are less administrative conditions attached to the credit facility under primary credit. For instance there are no restrictions on the usage of the primary credit program or facility. Alternatively, the institutions that do not meet the primary credit facilities can still apply in either the secondary credit or the seasonal credit (Paul, u.d).
Apart from lending to depository institutions, the Federal Reserve also lend credit facilities and programs to primary dealers. This is under the program initiated by the Federal Reserve in 2008. The program itself is an overnight credit facility. The program has since been divided into two classes. There are other lending programs that the Federal Reserve has put in place as to assist in overcoming the financial crisis that has claimed lots of jobs worldwide. For instance, the asset backed commercial paper money market mutual fund liquidity. This is a lending facility to the purchase of high quality asset backed commercial paper from the financial institutions and mutual funds by the depository funds and banks in the United States of America. This aims at assisting the funds holding such papers to meet the demands of redemption by investors and enhance liquidity in the money markets (David, u.d).
Federal Reserve has also offered the support for specific institutions that are of great influence on the economy of the country in one way or the other. This has seen some companies or institutions being funded by the Federal Reserve to offset it from the operational costs.
When the Federal Reserve has been actively involved in the management of the financial or economic crisis in its various programs, it has also initiated measures to safeguard itself from risks in case the institutions fail to repay the advanced loan facilities. For instance the use of monitoring of the financial conditions. This is a four step approach designed to reduce the risk of loss to the Federal Reserve by the weak or failing depository institutions. The Federal Reserve also monitors the condition of other borrowers apart from the depository institutions (federal, 2009).
The role of the federal reserve on the way forward after establishing that the markets are no longer in threat will be to revise some of the lending facilities and abolish some that are inconsistent with the federal reserve. This is within the powers mandated by the Federal Reserve Act Sec 13(3). It will have to closely monitor the market conditions for stability and determine whether the lending facilities or programs can be abolished and in what manner. The Federal Reserve has been purchasing the Treasury securities, agency bonds and mortgage securities. The Federal Reserve expects to reduce the balance sheet at the opportune moment. As the size of the balance sheet reduces, the Federal Reserve will be able to set the target for the federal funds as the primary tool in the conduct of the monetary policies. The management of the balance sheet by the Federal Reserve is to be made easier by the recent developments in the congress authorizing the Federal Reserve to pay the interest on the balances held by the depository institutions. The Federal Reserve expects that as the excess reserve reduces, the interest rate that is paid on the reserve balance will be important in advancing trading in market rates close to the target. As noted by Paul (u.d.), the Federal Reserve can formulate guidelines and policies that aim at maintaining the growth of the economic of the country in general. This can be done jointly by the treasury and the congress in addressing the issue s raised by the Federal Reserve. The Treasury can also assist the Federal Reserve by offering the treasury securities for the Federal Reserve for purchasing.
Inflation in an economy is not healthy. Just by mentioning the term inflation the immediate impact or reaction from people will mean increased spending, an increase in the standards of living translating to spending more of the income. The measures that the Federal Reserve has taken to contain and manage the current financial or economic crunch has left the public and economists divided with everyone having his or her piece of opinion to offer. The public is weary of the fact that the stimulus package offered by the Federal Reserve will result in the increase in the rates of inflation. The Federal Reserve has sought to reassure the public, experts and investors in general that they have taken all the necessary measures to hold down the inflation. This includes the Federal Reserve decision to hold down the lending rates so as to spur more of economic activities ( Erick,1999).
The decision by the Federal Reserve to hold down the lending rates will definitely pay of in the long run. This is intended to encourage the public get funding at a more affordable lending rates. This will ultimately result in the increased consumer spending leading to increased uptake of products and market stability. The public is worried of the consequences of the inflation incase it rises to unbelievable rate. At the same time, the worry of the recession that has seen massive loss of jobs and decline in the family incomes across the country. This has forced consumers to prioritize their expenses in order to live within the means of their income.
The Federal Reserve can manage to hold down the rate of inflation so that the consumers are not exposed to the soaring prices of commodities. It can do this but eventually the inflation is set to rise in the long run. It can only manage to limit the rate of inflation so that the gains achieved from the economic stimulus do not get lost on the inflation.