A monetary policy is a critical facet in economics that countries use to regulate their domestic economies. It involves the actions and communications of the central banks that aim at sustain employment, moderating interest rates and ensuring stability in terms of prices (Friedman, 1995). Changes in those three essential goals affect the economy of America, and it is the responsibility of the Federal Reserve Bank to monitor and influence how the economy grows and responds to the demands of America. Any economic policy change by the Federal Reserve Bank affects all the financial markets and institutions. I will thus focus on JPMorgan Chase, ranked as the largest bank in America by the stock Market Index, a multinational investment bank and a financial service holding company for the purposes of this assignment.
How Unemployment and Inflation in the American Economy is monitored and influenced by the Federal Reserve
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Unemployment and Inflation are dependent on the policy actions taken of the Federal Reserve Bank. The Bank monitors and influences inflation and unemployment through its key responsibility of regulating the supply of money in the economy through economic policy, regulating all monetary institutions besides supervising central deposit insurance of commercial banks in the national Reserve System (Eusepi & Preston, 2010).
When the economy sees reduced trading activities, it means that the level of unemployment is likely to go down. What the Federal Reserve will do is to influence employment through increasing the rate of economic expansion as a measure to induce the expansion of the domestic economy. The National Reserve will lower the discount rates to allow commercial banks access loans from them to meet liquidity deficits. In return, financial institutions will charge overnight interest loans leading to an increment in the supply of money in the economy whose impact is improved trade investments, creation of employment and enhanced buying power. This though is intertwined with inflation, in that an increase in liquidity induces inflation. To curb increasing inflation, the Federal Reserve Bank will tighten the Reserve requirements increasing amounts of money commercial banks will hold with the Central Bank Reserve. This removes extra money from commercial banks reducing the amount of money supply in country.
Federal Reserve’s Nontraditional and Traditional Monetary Policy Tools
Throughout history, economies go through boom and bust cycles. Whereas there are times when individuals enjoy favorable economic periods, downturns come with a lot of pains. The Federal Reserve thus comes in to help by employing various tools, both traditional and nontraditional tools to regulate the economy. The most frequent tools used include the Reserve ratio, Discount rates and Open Market Operations.
Traditional monetary tools often used by the Central Reserve include; Open Market Operations, a change in reserve requirements, a change in the discount rate and. A Reserve ratio is the fraction of money commercial banks are mandated to hold against their deposits. It’s a very powerful tool. An increase in the Reserve ratio will allow banks to hold more, thus reducing the amount of money, whereas a decrease in the Reserve ratio causes banks to lend more increasing money supply in an economy. Discount rates are the interest rates the Federal Reserve imposes on the commercial banks that intend to borrow additional reserves. Overnight interest rates will thus want to follow signals the Federal Reserve sends. Open Market Operations, as a Monetary Policy tool basically refers to the buying and selling of government securities by the Federal Reserve. Buying of securities by the Central Reserve increases money supply in the economy, and selling of the securities by the Federal Reserve decreases the amount of money in the economy.
Nontraditional monetary Policy tools, are tools used by the Central Reserve Bank that fall out of their normal traditional measures. They are usually used in times of deep economic distress, where the traditional methods have become ineffective (Williams, 2013). An example is during a recession, the Federal Bank can opt in a process known as quantitative easing, to buy securities outside of the ordinary government bonds, especially when the rates applied as interest are near zero so as to increase the money supply. This then leads to financial institutions getting flooded with funds to enhance lending and liquidity while ensuring new money is not printed.
The significance of the Federal Reserve’s Implementation of Expansionary or Contractionary Monetary Policy Tools under a Recession and a Boom
The Central Reserve uses two different policies to control the economy in times of an economic boom or a recession. The Expansionary Monetary policy is when the National Reserve Bank increases the amount of money in an economy, while a contractionary policy is when the National Reserve Bank decreases the amount of money in an economy.
Economic Boom
This is marked by increased business activity in an economy as a whole, though it can also be in particular markets, industry or businesses. It’s a period individuals and businesses experience rapid sales growth, increase in employment and a higher inflation rate. A contractionary monetary policy is often applied in a boom to prevent overheating of the economy. This policy helps to lower the level of aggregate demand lowering consumption, decreasing government spending through cuts, reducing investments and increasing taxes. The main disadvantage with this is the slowing down of production because of the expensive investment capital and the sharp decline in demand for products and services.
Recession
This is a time of declining economic performance throughout the economy. Business activities reduce, and generally money supply too reduces. An expansionary monetary policy will be used by the Federal Reserve as a means to stimulate the growth of the domestic economy. The Federal Reserve Bank will lower the discount rates to allow commercial banks access loans from them to meet liquidity scarcity. In return, financial institutions will charge overnight interest loans leading to an increase in the amount of money in the economy whose impact is improved investment in trade, creation of employment and enhanced buying power. The unintended consequence will be inflation, in that an increase in liquidity induces inflation.
The Financial Situation of JP Morgan Chase in the Last five years
This is the largest bank in America according to the stock Market Index. It is a multinational investment bank and a financial service holding company.
The Stock market index for the JPMorgan Chase has shown a consistent increase from January 2016 to February 2020. This shows that there was a general investor confidence and the bank saw tremendous growth which is indicative of the growth in the economy. This therefore means that there was a boom in the economy and more money was in the supply. However, from February 2020, the stock market index indicates a drastic continuous drop which means the economy is going to a recession. The sharp decrease can be attributed to investors withholding their money, reducing the excess money the bank is holding, and thus it cannot lend to other borrowers (Hameed et al., 2010). The consequence of this is that less money goes into the economy and therefore a recession is setting in. we can also point it to the emergence of the Covid-19 global pandemic which has drastically reduced trading activities in the larger economy and within sectors. This has also caused loses of jobs among many citizens. See Figure 1 below
Figure 1 JP Morgan Chase Market Index 2016-2020
Source: JP Morgan Chase
JP Morgan Chase Response to the Federal Reserve Monetary Policies
The Institution is dependent on the signals the Federal Reserve Bank sends to them because it has the key responsibility of regulating the amount of money in the economy through economic policy, regulating all monetary institutions and supervising Federal deposit insurance of commercial banks in the National Reserve System. What has been happening between 2016 and 2020 is an economic boom that was coupled with increased business activity in the financial market and the economy as a whole. JP Morgan Chase experienced a rapid sales growth. The Federal Reserve is likely to have altered the reserve requirements by increasing the Reserve ratio forcing JP Morgan Chase to lend less in a bid to try reduce the excess money in JP Morgan Chase that would ultimately ended in the hands of the public.
JP Morgan Chase Response to the Federal Reserve Monetary Policies in the Financial Market
JP Morgan Chase because of its size gets a tremendous advantage over other financial institutions. Its financial size crowds out other commercial banks in cases of a repo market, which is essential to other borrowers. The federal reserve in particular circumstances allows financial institutions with a lot of securities to borrow cheaply, allowing those with lots of cash to get a return on that money with minimal risk (Sale, 2013). The effect of the Federal Reserve on JP Morgan is thus cushioned because of its massive size in terms of financial assets. However, overall, the Bank lending rates went low as indicated in the figure below.
Figure 2 Consumer lending rates
Source: Federal Reserve
Expected Changes in the next six months on the Federal Reserve’s Monetary Policy based on the Financial Market today
The general trend currently is a decline in economic performance throughout the economy, including the financial markets. This will continue for the next six months. Business activities are reducing, and generally money supply too is reducing. The expansionary monetary policy will be used by the Federal Reserve as a means to stimulate the growth of the domestic economy. The Federal Reserve Bank will lower the discount rates to allow commercial banks access loans from them to meet liquidity shortages (Campbell et al., 2012). In return, financial institutions will charge short term interest loans leading to an increase in the amount of money in the economy whose impact is improved trade, creation of employment and enhanced buying power. The unintended consequence will be inflation, in that an increase in liquidity induces inflation.
In the face of a recession as anticipated, a halt in the economic growth of the country is expected. This is expected to come along with unemployment and decreased spending by individuals, businesses and companies. The decrease in profits basically means that the stock prices too have to fall, lowering all the stock market.
The Federal Reserve monetary policies in the wake of a recession are; Open Market Operations, a change in Reserve Ratio, and a change in the discount rate and. A Reserve ratio is to the proportion of Money commercial banks are mandated to hold against their cash deposits. It’s a very powerful tool. The Federal Reserve Bank will decrease the Reserve Ratio. The impact on JP Morgan Chase is the effect of the bank lending more increasing money supply.
The Federal Reserve Bank may also want to decrease the discount rates. Discount rates are the interest rates the Federal Reserve imposes on the commercial banks that intend to borrow additional reserves. The effect on JP Morgan Chase is that the overnight interest rates will thus want to follow the signals the Federal Reserve Bank sends.
The Federal Reserve Bank may impose monetary tools such as an Open Market Operation. This is the buying and selling of the government securities by the Federal Reserve from other financial institutions including JP Morgan Chase. Buying of securities by the Federal Reserve Bank increases the amount of money in the economy, and selling of the securities by the Federal Reserve Bank decreases the amount of money in the economy.
In case the recession slumps, the Federal Reserve may impose measures that fall out of their normal traditional measures if the normal measures have become ineffective. An example is during a recession, the Federal Bank can opt in a process known as quantitative easing, buy securities outside of the ordinary government bonds, especially when the interest are extremely low or near zero so as to increase the amount of money supply. This then leads to financial institutions getting flooded with funds to enhance lending and liquidity while ensuring new money is not printed.
References
Campbell, J. R., Evans, C. L., Fisher, J. D., Justiniano, A., Calomiris, C. W., & Woodford, M. (2012). Macroeconomic effects of federal reserve forward guidance [with comments and discussion]. Brookings Papers on Economic Activity , 1-80.
Eusepi, S., & Preston, B. (2010). Central bank communication and expectations stabilization. American Economic Journal: Macroeconomics , 2 (3), 235-71.
Friedman, M. (1995). The role of monetary policy. In Essential Readings in Economics (pp. 215-231). Palgrave, London.
Hameed, A., Kang, W., & Viswanathan, S. (2010). Stock market declines and liquidity. The Journal of finance , 65 (1), 257-293.
Sale, H. A. (2013). JP Morgan: An Anatomy of Corporate Publicness. Brook. L. Rev. , 79 , 1629.
Williams, J. C. (2013). Will unconventional policy be the new normal?. FRBSF Economic Letter , 29 (7).
