Two things in particular come hand-in-hand with being the world’s largest economy: a

worldwide faith in the value of the nation’s currency (“reserve currency”)and a relatively
standard means for comparison against any other nation’s currency. Domestic monetary policy
envelops both of these topics which influence America’s global image, along with other
fundamental economic concepts such as the standard interest rate and regulation of federal and
individual reserves. Understanding America’s monetary policy depends fundamentally on
understanding America’s mixed economic system since all action and regulation regarding
macroeconomic monetary decisions involve the government.
An effective monetary policy will encourage GDP and employment increases while stabilizing
prices and interest rates to encourage consumption and investment. America’s economic
regulation agency, the Federal Reserve Board (the Fed), has defined “[promoting] maximum
employment, stable prices, and moderate long-term interest rates” as its driving goals. The
Federal Open Market Committee, America’s monetary policy specific council, analyzes
consumption and employment trends, among others, to optimize the inflation and unemployment
rates. A nation can pursue its monetary goals through an expansionary or a contractionary
approach, depending on the economic welfare of the country and its openness to risk.
Expansionary methods consist primarily of decreased interest rates, which discourage saving
thereby forcing consumption and investment. An increase of money in the market typically
boosts an economy, making this approach effective for economies experiencing recession or
decline; however, increased consumption also yields increased inflation and cost-of-living which
can discourage people from spending even more than low interest rates encouraged them to
spend. Contrarily, increased interest rates generally define contractionary policy, which America
typically employs to slow the inflation rate and encourage saving in times of economic wellness.
Contractionary policy also allows for slower, more consistent growth, thereby decreasing the
economic risk of its use.

From lardbucket.org | Left: Expansionary policy forces money into the market thereby increasing aggregate demand (AD1 -->
AD2) yielding higher prices, more consumption, and increased GDP. Right: Contractionary Policy forces demand lowed yielding
lower prices, less consumption, and decreased GDP; however, consumers are building more wealth (via. Saving) which can yield
individual benefits even when the less aggressive government policy can appear negative on the economy.
For the last three years, America has ardently adopted a contractionary approach after employing
the most expansionary approach possible (with nearly 0% interest rate) during and for over half a
decade following the 2008 recession. These choices uphold the protocol of forcing consumption
in economic downturn to bolster businesses profits and drive the nation out of recession then
encouraging saving during periods of relative economic well-being. Since 2015, the FOMC has
deemed the economic atmosphere healthy and stable enough to try to drive money out of the
market and it intends to continue doing so, despite the opposition of President Trump and some
prevalent economists. While normative in nature, Americans’ responses to interests rates at Great
Depression levels all but forced Powell and the Fed to increase rates as to imply that the nation
has recovered from the more recent recession. The Fed currently intends to systematically
continue increasing the interest rate, but a 2019 downturn could force levels back to the near-
zero mark.

Nearly all economies have seen decreasing interest rates in the past ten years, as well as over the
last century. These decreases can indicate a global reluctance to take money out of the market
and risk hurting consumption, which would consequently hinder a nation’s trade. Furthermore,
decreasing consumption could also damage GDP and unemployment among other fundamental
economic metrics. Conversely, these nations also run the risk of inhibiting their inhabitants’
saving to an extent that decreases their well-being. Several experts believe that the declining
interest rate has little to do with domestic governance, but rather suggests a worldwide supply-
demand discrepancy whose presence casts doubt on the wellness of the economy, even in
seemingly healthy periods.
voxeu.com 1

Alongside dictating interest rates, the Fed also manages monetary policy by controlling the
supply of currency available, thereby determining the inflation rate. Since the American dollar
holds global worth with over half of all reserves worldwide containing the greenback, the Fed
must accurately and efficiently determine its value and mandate how much it wants to change
that value in a given year. Over the past fifteen years, policymakers have tried to maintain the
inflation rate at approximately two percent, with the only significant deviation occurring during
the 2008 recession.
With 1.7 trillion USD outstanding, the American dollar constitutes over twenty percent of global
currency in circulation; consequently, large-scale inflation would yield a less reliable and
prevalent dollar but no inflation could eventually render the dollar obsolete (i.e. if America never
produced money again). Therefore, the Fed has to optimally define the inflation rate by
controlling the amount of currency produced and regulating the amount of cash banks carry.
Regulators can approach the former in primarily two ways: The Fed can simply produce less
currency, which will not make inflation zero but will decrease it significantly; or, the government
can put more money in its own hands (and control it from there) by collecting from its debtors or
selling debt for cash.
Venezuela presents a current example of poor monetary policy, specifically in the realm of
inflation. Under president Maduro, Venezuela’s Bolívar has seen 1000000% inflation
(unfortunately that is not a typo, it really is one million percent), with an anticipated additional
ten-million percent in 2019; consequently, prices double every nineteen days on average. This
exorbitant inflation resulted from Maduro’s socialist policies such as frequent minimum wage
increases (34 in the past four months), along with simply poor economic decision making such as
linking its currency to an unsteady oil reserve. The Maduro regime’s has sent its economy
tumbling to a point where it will require decades of reconstruction, primarily because of its
mediocre monetary policy.

Trading Economics 1