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Essay / Research Paper Abstract
This 4-page paper examines if, in principle, the Federal Reserve could purchase securities on the NYSE, and the impact of the Fed's purchase of foreign currency on the domestic economy. Bibliography lists 3 sources.
Page Count:
4 pages (~225 words per page)
File: D0_MTfedres.rtf
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Unformatted sample text from the term paper:
through both purchase and sale of government bonds. But as much of the 20th century has demonstrated (and the early part of the 21st century) the sale of private securities
through markets such as the New York Stock Exchange has also influenced the economy -- interest rates and stock prices have been linked by many economic experts.
The question we need to ask ourselves, therefore, is that in principle, could the Fed control monetary policy through activity on the stock market --
through purchase and sale of private security shares? Furthermore, if the Fed were to purchase gold or foreign currency, how would this impact the domestic currency supply?
We can answer such questions backed by some historical facts. The answer to the first question is yes -- in principle, the Fed could conceivably
become an active player in the NYSE. According to the Feds charter, it can add to its stock of bank reserves and currency through purchase of any asset -- including
NYSE-listed stocks (Wheelock, 2002). In reality, however, U.S. Treasury securities are better when it comes to manipulating monetary policy (Wheelock, 2002). History has proven (especially during the Great Depression) that
such a move would not be the best idea. For one thing, the Treasury market is large, flexible and liquid (Wheelock, 2002).
This means the Fed has control over and can conduct large transactions, providing it with control over institution reserve balances (which, in turn, impact the federal funds rate) -- and
can do so without a huge impact on market prices (Wheelock, 2002). Second, and perhaps more important to our question, is that relying on open market transactions in the Treasury
...