The Federal Reserve Keeps Expansionary Monetary Policy: Good or Not?

Last few weeks, my blog focused on the corporation finance: merger and acquisition. However, to operate the business, the macroeconomic environment should be taken in account. This week, I would like to review the Federal Reserve’s (FR) monetary policy. According the definition of monetary policy, in order to keep the stability of the market and GDP development, the Federal Reserve uses the interest rate and money supply to control the macro economy. The monetary policy could be divided into two parts: expansionary monetary policy and tight monetary policy. In this credit crisis, the Federal Reserve provided the expansionary monetary, which means that they increase the supply of the money to the market.

On 14^th, March, the Federal Reserve declared their policy would keep the expansionary monetary method. Since the 2007, the FR provided the expansionary monetary policy. From 18^th, September 2007, the FR adjusted the federal funds rate from 5.48% to 0.25%. At the same time, the FR increased the minimum period of liability, from 1 day to 90 days. Meanwhile, the FR used the 700 billion dollar to incentive the market to develop the liquidity of the market again. However, the result is not so convinced. American economy did not recover from the crisis. Apart from that, the increased money liquidity leads to a new challenge of inflation. Golden price, petrol price and commodity prices have been challenged at the same time. So is this policy real benefit for the market? The efficiency and effect of this policy have been doubted by the market.

 

Where was the money? According to the research by Dr. Ye of University of Alabama in the USA, these policies did not let the capital flow to the companies, but just buy the NPA (non-performing asset). And the interest policy just pushed the investors from the long-term financial investment, shelter. The benefited party should be these giant investors who lost money in the financial crisis. Compared with the Roosevelt's New Deal in 1927 crisis, these policies in this crisis lost their target and efficiency. In 1927's crisis, the government spent the money on the public infrastructures to provide the opportunities in the market, but this time, the FR just want to fix their lost. Is that a good thing for survive the crisis? So why do they keep these policies?