Introduction
The Federal Reserve Bank serves as the United States central bank. It regulates financial aspects of the economy through the making of monetary policies. Money aggregates refer to broad categories of measuring an economy’s money supply aspects. The United States of America has four standardized monetary aggregates. The first monetary aggregate is M0, which comprises of coins and physical paper. The second is M1 which includes demand deposits and traveler’s checks. The third aggregate is M2 which consists of the M1 aggregates, deposits of savings and money market shares. M3 is the fourth aggregate that comprises of time deposits and institutional funds. The two most used aggregates are M1 and M2. The Federal Reserve System regularly tracks M1 and M2 amounts and prepares money supply information on a weekly and monthly basis (Wiles, 2015).
M1 and M2 aggregates have increased quickly over the recent past. M1 has rapidly grown in comparison with M2 which has not grown so much. The chart below illustrates the rapidness in the growth of M1 due to its positive correlation with the growth in reserves as a result of the Fed asset purchases. The reason for this growth lies within the Fed assets which are also Bank assets. With the increase in Federal Bank reserves, smaller banks have to sell the assets that they own and issue more equity or liability to expand their asset levels (Bordo, Duca & Koch, 2016). The financial implication of this move by banks means that a lot of money is gained through low-interest rates and increased deposits and. Instead, banks increase their funds by issuing more liabilities like loans. Savings deposits also add to the funds as more people save their money in banks accounts. As a result, M1, which refers to demand deposits and traveler's checks increased more than M2. The current monetary economy then means that banks have huge amounts of money can offer loans to its customers. Businesses can then receive the financial assistance that they require. It is, therefore, safe to say that the U.S. economy is stable.
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U.S Monetary aggregate Trends
The main responsibility of the Federal Reserve is to formulate and implement good monetary policies that will help businesses to stabilize in their financial operations. The Fed monetary policy is meant to promote maximum economic performance for the nation over time. The greatest way that the Fed can achieve this goal is through maintaining low inflation rates (Galí, 2015). This way, a sustainable economy that comprises stable prices, sufficient employment opportunities and moderate interest rates for long-term periods is attained. The way that the Fed seeks to make a reality the achievement of its monetary policy mandate is through influencing interest rates as well as dictating the general conditions of financial aspects of the economy. An example is by ensuring that policy interest rates are kept low. The Fed can also provide the necessary finances that local businesses need for investments and making local goods affordable for customers. The Fed manages to stabilize the U.S, economy through raising policy interest rates at times when inflation has increased and thus preserving price stability of gods.
Conclusion
Central Banks of all nations are critical in ensuring that the stability of the economy is achieved. The Federal Reserve Bank of the U.S., therefore, is hugely responsible for controlling business transactions of the country and promoting sustainability of the economy. This major financial institution does this by regulating the use of monetary aggregates especially M1 and M2. The flow of these aggregates within the economic system ensures that a balance is achieved and that people, businesses and the entire society do not suffer from the effects of high inflation.
References
Bordo, M. D., Duca, J. V., & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level US evidence over several decades. Journal of Financial Stability, 26, 90-106.
Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.
Wiles, W. W. (2015). Federal Reserve System. System.
