The recession period caused by wars and other unpredictable events exposes financial institutions to economic shocks calling for monetary normalization. Such normalization entails adjusting the interest target rates set by the Federal Open Market Committee( FOMC) (” Board of Governors of the Federal Reserve System,” 2022). The Russia- Ukraine war has made Central banks, FED, and ECB adopt unprecedented policy actions to normalize monetary policy worldwide and ensure adequate liquidity throughout the markets.
Central banks have adjusted the supply of money. It has embarked on reducing the money supply by shifting to the selling of government bonds using open market operations and signed sales and repurchase agreements (Monetary Policy and Central Banking, 2022). This move has enabled the central bank to receive money from commercial banks and retain their money throughout this financial crisis. The reduction of money supply has also helped central banks minimize private consumption and increase interest rates, thereby discouraging lending and investment (Monetary Policy and Central Banking, 2022). Following these efforts, central banks have normalized the monetary policy.
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Besides reducing the money supply, central banks have adopted an inflation-targeting framework from a monetary aggregate. Through the inflation-targeting framework, the central bank has responded to financial shocks and reduced investor uncertainty (Monetary Policy and Central Banking, 2022). Investors have utilized the inflation-targeting framework to predict interest rates changes and other inflation expectations caused by the Ukraine war. Increasing investor certainty and transparency in interest rates changes have enabled the Central bank to normalize monetary policy and shield its customers from economic shocks in the face of the Ukraine wars. Banks like FED and ECB have also adopted actions to address the economic downturn.
The Federal Reserve System( FED) has reduced its federal reserve security holding. FED has reduced its reinvestment on securities principal payments usually held in the system’s open market account (” Board of Governors of the Federal Reserve System,” 2022). Lowering the reserve security holdings has enabled FED to lower cash on hand and increase its cash at the bank to support its customers and businesses through loans. Through this strategy, FED has increased its revenue and has supported the economy through loans.
FED has also increased the range for federal funds up to the normal levels. FED hopes to increase the cost of loans throughout the economy by increasing the federal fund’s target rates, as the interest rates will be higher (” Board of Governors of the Federal Reserve System,” 2022). When the interest rates are high, loans are very expensive for individuals and businesses, spending more while repaying the loans. This has enabled FED to increase its revenue earned from interest rates and increase its support to businesses affected by the Ukraine wars. Also, an increase in interest rates has made some people reluctant to invest their money, and they end up saving to earn high-interest payments. In the end, FED has been able to normalize its monetary policy and generate money to stabilize the economy.
European Central Bank ( ECB) has also taken actions to normalize the monetary policy to guard itself against financial shocks caused by the war in Ukraine. ECB has increased its interest rates to normalize its monetary policy and protect consumers and businesses from high energy costs, which have increased tremendously from a year ago (Komileva, 2022). With high-interest rates, countries with large debtors like Italy suffer from recession, discouraging private investment as loans are very expensive. Private sectors end up saving up their money to yield high-interest payments. ECB bank, in turn, earns its revenue from subsidies and utilizes that money to support the affected economies. ECB has also withdrawn non-standard policy measures that subject short-term interest rates below zeros. Withdrawing from the non-standard policy has helped the bank raise its interest rates and receive its interest income. ECB utilizes the income from interest to support different economies in financial crises.
In conclusion, the Ukraine war has affected banks causing them to embark on normalization of their monetary policy and adjusting their operational frameworks to achieve stable inflation. Central banks, FED, and ECB have adopted various strategies to support the economy amid the heightened crisis. The Central bank has reduced its money supply and focused on selling government bonds. FED and ECB have increased interest rates to earn revenues as loans are very expensive. These efforts have enabled them to navigate the volatile financial crisis and inflation period. The revenues earned through monetary normalization are used to support customers and businesses affected by the Ukraine wars to stabilize the economy.
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Board of Governors of the Federal Reserve System”. (2022). Federal Reserve Board – History of the FOMC’s Policy Normalization Discussions and Communications. Board of Governors of the Federal Reserve System. Retrieved 22 April 2022, from https://www.federalreserve.gov/monetarypolicy/policy-normalization-discussions-communications-history.htm.
Komileva, L. (2022). How the ECB Should Begin to Normalize Monetary Policy. Retrieved 22 April 2022, from https://www.washingtonpost.com/business/how-the-ecb-should-begin-to-normalize-monetary-policy/2022/04/11/bdd8ee62-b95c-11ec-a92d-c763de818c21_story.htm.
Monetary Policy and Central Banking. (2022). Monetary Policy and Central Banking. IMF. Retrieved 22 April 2022, from https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/20/Monetary-Policy-and-Central-Banking#:~:text=.