A Summary Of The US Monetary Policy : Peering Into 2018

The last time the Fed raised interest rates (to 5.25%) was in 2006. This move was soon reversed as the 8 trillion dollar housing market bust sparked the global financial crises. About 8.7 million jobs (about 6%) were lost, unemployment rose to about 10% nationally leaving many households with less to spend and higher debt.

The Federal Reserve should utilize a balanced approach to monetary policy. The current state of the economy—undershot employment and inflation goals—presents no conflict in achieving a neutral state. In fact any action that supports employment growth also moves inflation up toward our target (Evan

The nation's monetary policy is set up by the Federal Reserve in order to support the aims and objectives of better employment, stable prices and a suitable and logical long term interest rates. One of the main challenges that are faced by policy makers is the stress among the aims and objectives that can occur in the short term and the fact that information regarding the economy becomes delayed and can be inaccurate (Monetary).

Most people don’t understand Economic growth or what takes place in the economy with regard to inflation, unemployment, or interest rates. These things are all regulated by the central bank called the Federal Reserve System. The tope covered in this paper is the monetary policy which is the policy that decides if unemployment, interest, and inflation decreases or increases. The Monetary policy decides what price a person pays for an item at the store, how much interest a person will get charged on a loan for a car. This is something most people consider, most just look for the best price point or look where their money can go the farthest.

As mentioned, the U.S. economy has seen a positive shift in the last few years. According to Janet Yellen (the Chairman of the Fed), "the private sector has created 7.8 million jobs since the post-crisis low for employment in 2010." Additionally, housing seems to have turned a corner in which construction, home prices are all up significantly, and as I mentioned earlier, housing was a large sector that was impacted during the Great Recession and the loss was staggering ("The U.S. Economy"). Another area that we are seeing tremendous growth is within the auto industry. The auto industry has made an incredible comeback with domestic production and sales back to near pre Great Recession levels. Our economy today is showing the unemployment levels down from a peak of ten percent, and has reached the point of full employment once again. According to Jared Bernstein of the New York Times, "Last month the national unemployment rate fell from 5.9 to 5.8 percent" thus showing that we are back to full employment according to what I have been taught in class, though I am finding some dispute over what numbers should be considered full employment. Nevertheless, our economy is showing a real growth in helping fellow Americans get back to work. In addition to unemployment decreasing we are also seeing a decrease in inflation. According

Monetary policy focuses on keeping interest rates at a modest level, keeping prices steady, and keeping unemployment low. The Federal Open Market Committee is responsible for making the necessary monetary policy changes. These changes influence both the markets within the United States and the markets internationally. Currently, there is a lot of volatility within the markets, and there is a lot of speculation about if and when the Federal Reserve will raise interest rates. There is also speculation about whether a negative interest rate would work to get the economy back on target. Also, many worry about whether the current government debt level will continue, and with the number of people entering retirement increasing, whether there will be enough money coming in to cover the costs of the social programs, such as Social Security and Medicare.

Federal Reserve policymakers believe the most probable outcome for this year to be a pickup in the pace of economic expansion. The central tendency of the real GDP forecasts made by the members of the Board of Governors and the Federal Reserve Bank presidents is 3.25 percent to 3.5 percent, measured as the change between the final quarter of 2002 and

The first Federal Open Market Committee (FOMC) meeting under Janet Yellen’s leadership brought a much anticipated format change in communication policy, as well as a widely discounted $10bn reduction in monthly asset purchases. There was also abolition of the so-called Evans Rule, which allowed some overshooting of the Fed’s 2% long-term inflation target. Despite the new Fed Chair trying her utmost to portray the policy outlook as dovish, financial markets were not entirely convinced. Altering forward guidance was always going to be the biggest challenge in 2014, particularly given the faster-than-anticipated decline in unemployment. Policy thresholds have been abolished.

Meanwhile, strengthening activity has also been registered in the service sector: the ISM’s Report on Non-Manufacturing Business also increased significantly in September. Recent readings of live GDP forecasts for Q3, courtesy of the Federal Reserve Bank of Atlanta, have been trending upwards over the past few weeks, the latest being +2.7%. Carrying such momentum into Q4 would, therefore, suggest more labour market tightening, thereby further justifying an increase in the federal funds rate in December. Crucially, both ISM Surveys indicate that price pressures have been rising significantly over the past four months, helping to support Fed Chair Yellen’s view that weaker-than-expected inflation is attributable to transient forces.

On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, the committee agreed to continue its monthly $85 billion purchase of Treasury and mortgage-backed securities as long as the unemployment rate remains above 6.5 percent. Inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal and longer-term inflation expectations continue to be well anchored .

Though it may seem like great to have money flowing through our economic system, the government also needs to concern itself with inflation. If the Fed provides too much stimulus to the economy and triggers inflation, prices will rise above the inflation target that the Fed has already set. During inflationary periods the purchasing power of the dollar is failing. Consumers buy to avoid higher future prices. This increases demand, which positively affects

The Fed has, over the past few years, been lowering its estimate of long-term potential real GDP growth. Presently, the Federal Open Market Committee (FOMC) believes the US economy is capable of sustaining expansion of just +1.8% per annum. This estimate is based on two components: 1) anticipated labour force growth of +0.3% pa, and 2) annual productivity increases of +1.5%. Given the Fed’s commitment to its 2% long-term inflation target, this backdrop would consequently imply that wage inflation should be running at around +3.5% when the economy eventually hits full employment. Average hourly earnings have been ticking up recently, thereby confirming that the US labour market is tightening, although the annual increase is still below +3%. There is, however, still some slack in the labour market, as characterised by the “U6” measure of underemployment which is still 150 basis points above its low reached during the previous expansion. Fed Chair Yellen has been prepared to wait until broader measures of labour underutilisation, such as U6, improve further. The luxury of being able to sit pat is, however, now fading. Financial markets now expect the FOMC to raise the federal funds rate at this year’s final policy meeting next month. Meanwhile, the FOMC will still be keen to stress that any subsequent rate hikes will remain gradual. This seemingly benign outcome may, however, be beyond its control: fiscal policy will be eased in 2017,

After a dismal job growth in May and the Brexit shock in June, a few analysts speculated whether the Fed’s next move would be a rate cut instead of a hike. However, since then, the global economy has stabilised and the US economic indicators point

This consequently puts monetary policy firmly on a discretionary footing. By contrast, monetarists have always denied that a long-term trade-off between unemployment and inflation exists due to the neutrality of money. The existence of any inverse relationship between the former and latter is captured by the natural rate of unemployment. The Fed’s estimate for this key metric had been revised down earlier in the summer to 5.1%. The release of the economic projections used at last week’s FOMC meeting indicates that this measure has, once again, been lowered to 4.9%. A few weeks ago, I argued that the case for the Fed raising its policy rate this month depended critically on the conviction of its estimate of the natural rate. Thus, it appears that continued weak wage inflation has convinced the FOMC that 5.1% was too high an estimate. The current stance of policy has, therefore, scope to remain intact. The big issue for financial markets is just how much more leeway the Fed will provide in keeping conditions accommodative. The recent behaviour of inflationary expectations has clearly been noted by the FOMC. Fed Chair Yellen admitted that the decline had made achieving the 2% medium-term inflation target more difficult. The drop in expected inflation may have also driven the FOMC to lower their estimate of the natural rate of unemployment. This will, however, be breached by 2016 Q4. The

Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed