Monetary Policy Essay Example | Topics and Well Written Essays - 1500 words

Monetary Policy - Essay Example Specifically, a core committee within the central bank is tasked to design and undertake monetary policies based on their assessment of economic conditions and objectives to be achieved. This paper compares the operations and mandates of the three most influential monetary policy-making bodies, namely the US-Federal Open Market Committee, Bank of England-Monetary Policy Committee and European Central Bank-Governing Council. The FOMC is considered as the foremost policy-making body of the US Federal Reserve. It primary function is to formulate monetary policies which serve to promote economic growth, full employment level, stable price level and sustainable pattern of international trade (Federal Reserve Bank of Minneapolis). This aim is achieved by making key decisions pertaining to the conduct of open market operations, i.e. the selling and purchasing of US Government and Federal Agency securities. Open market operations mainly affect the provision of reserves to banks and other depository institutions. In this regard, open market operations impact the cost and availability of money and credit in the economy of the US (Federal Reserve Bank of Minneapolis). As a background, the FOMC is composed of seven members of the Board of Governors and five Reserve Bank Presidents, who must meet at least four times a year in Washington D.C. as mandated by law. It is during these committee meetings that FOMC decides on the policies to be carried out through voting. In view of the monetary decisions it has to make, the FOMC takes into account vital economic factors such as trends in prices, wages, employment, production, consumption, investments, foreign exchange markets, interest rates, and fiscal policies among others. It should be noted that the monetary policies are implemented with primary focus on supplying level of reserves which is congruent with the economic objectives of the US, both in the short-run and long-run (Federal Reserve Bank of Minneapolis). This means that the control of open market operations is FOMC's major tool to directly influence the money supply in the economy. The movement in money supply will then affect the other economic factors based on the economic objectives of the nation. Bank of England-Monetary Policy Committee (MPC) The MPC's main function is to regulate prevailing interest rates at an appropriate level in order to attain the inflation target over a period of two years. This committee primarily considers the economic performance of the country and determines whether this is accompanied by the risk of acceleration in overall price levels ("Bank of England"). The MPC, which is chaired by the Governor of the Bank of England, consists of five members from the Bank of England and four external members appointed by the chancellor (Bank of England). The setting of interest rates is decided based on the conditions of domestic monetary market, foreign exchange market, production market and labor market ("Bank of England"). To curb inflation, the MPC's primary tool is the setting of interest rates. Should the MPC determine that aggregate demand is expanding and exerting upward pressure on prices, the committee will decide to raise the interest rates in order to control the growth of investment