The Story of the Federal Reserve System Part 3: The Balancing Act

Last weeks Friday Funnies covered some of the key functions that the Fed performs. This week’s comic looks at the balancing act that the Federal Reserve performs.

The job of making monetary policy often is a balancing act, as the Fed has to make sure that money and credit don't grow either too slowly or too rapidly.
The job of making monetary policy often is a balancing act, as the Fed has to make sure that money and credit don’t grow either too slowly or too rapidly.
If they grow too slowly, funds won't be available for loans, and people and businesses will find it harder to borrow to make major purchases.
If they grow too slowly, funds won’t be available for loans, and people and businesses will find it harder to borrow to make major purchases.
Insufficient money and credit growth can lead to a recession, a period in which economic activity (such as production and spending) delcines and unemployment rises.
Insufficient money and credit growth can lead to a recession, a period in which economic activity (such as production and spending) declines and unemployment rises.

While some recessions might result from monetary policy of the Fed, our current recession is mainly the result of the impacts of the COVID-19 global pandemic shock to labor productivity and consumer demand. The Fed is currently concerned that fiscal policy might be needed to inject more money into the economy since the Fed has already exhausted most of its ability to increase credit growth. Fiscal policy (spending by the House and Senate appropriations) can help boost demand for goods and services in the economy by building infrastructure and providing cash to individuals and businesses that have either slowed down or stopped working all together.

On the other hand, when money and credit grow too much, the result can be inflation - a sustained and rapid increase in the price level. How can you raise your prices so often? Well, everyone who comes in to buy seems to have a lot of money to spend, so we figure we can raise prices and still sell the appliances.
On the other hand, when money and credit grow too much, the result can be inflation – a sustained and rapid increase in the price level.

Next week we’ll cover the negative impacts of inflation. Since it has been so long since we’ve had high inflation in the United States, it is an important lesson to cover based on our historical experience.

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