Case Study: Modestly Accommodative Policy

Max: Now that we have taken care of fiscal policy we must acknowledge the second half of the efforts to pull ourselves out of the recession. Monetary policy! Monetary policy is the action of the federal Bank of the United States of America to manipulate the economy using the three tools. The three tools are open market operations, discount rate, and reserve requirements. The most commonly used tool is OMO’s, the fed buys bonds from the federal government and then sell to the public. With the profit they make from the bonds sold to the public they buy more bonds. And then it continues in this cycle.

Using quantitative easing has helped the recovery of the USA and other developing countries. The Fed’s then limited their ability to pursue more measures, but congress ignored those appeals to help support the economy. The Fed’s decided to use smaller steps to help investor expectations and to prevent a possible financial crisis in Europe. In 2011 it was announced that the FED’s would hold short-term interest rates close to zero percent through 2013; to help support the economy. Soon after it was announced that using the “twist” operation would push long-term interest rates down, by purchasing $400 billion in long-term treasury securities with profits from the sale of the short-term government debt. Inaugurating a policy to help shape market expectations, which will raise interest rates at the end of 2014.

Given its mandate to maximize employment and maintain price stability, the Fed took monetary policy actions in December 2008 to keep long-term interest rates at near zero (between 0.0% and 0.25%) to help stabilize and revive the U.S economy -- leaving no option for further interest rate reduction.

Although business leaders may not have a crystal ball to help them plan for the future, they do have access to a wide range of Federal Reserve publications that can help identify recent and current trends and what these economists believe will take place in the coming months. Given the lingering effects of the Great Recession of 2008 on the American economy today, identifying the future economic outlook for America using this type of freely available information therefore represents a timely and valuable enterprise. To this end, this paper provides a review of relevant publications to identify the Federal Reserve's current assessment of economic activity and financial markets, its current view about inflation and various monetary tools that have been used to stabilize the economic and prices in recent years. Finally, an analysis of the economic outlook for the next 12- to 18-month period is followed by a summary of the research and important findings in the conclusion.

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

The discussion of whether the Federal Reserve should raise the federal funds rate is a highly contentious one. Members of the Federal Reserve (“Fed”) and academic economists disagree about what constitutes appropriate future macroeconomic policy for the Unites States. In the past, the Fed had been able to raise rates when the unemployment rate was under 5% and inflation was at a target of 2%. Enigmatically, since the Great Recession and despite a strengthening economy, year-over-year total inflation since 2008 has averaged only 1.4%—as measured by the Personal Consumption Expenditures Price Index (“PCE”). Today, PCE inflation is at 1-1.5% and has continuously undershot the Fed’s inflation target of 2% three years in a row. (Evan 2015) In the six years since the bottom of the Great Recession the U.S. economy has made great strides in lowering the published unemployment rate from about 10% back down to about 5.5%. In light of this data, certain individuals believe that the Federal Reserve should move to increase the federal funds rate in 2015 because unemployment is near 5% and inflation should bounce back on its own (Derby 2015). However, this recommendation is misguided.

According to staff review of the financial situation for January 28-29, there are developments in emerging market economies. The Fed will continue to support Monetary economic situations over the intermeeting period, they were critically affected by Federal Reserve correspondences, to some degree better-than-anticipated economic information discharges, and advancements in developing market economies. On net, monetary conditions in the United States stayed strong of development in economic action and work: Equity costs is wrinkled a bit, longer-term investment rates declined, and the

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve including both the traditional and non-traditional measures to ease credit markers and stimulate the economy.

“Is the current U.S. monetary policy too expansionary? Are interest rates too low or are they not low enough?”

Eric Rosengren, President of the Federal Reserve Bank of Boston, and John Williams, President of the Federal Reserve Bank of San Francisco, have both been known as “doves” in their individual monetary policy opinions and votes over the last five years. Since the summer of 2015, there has been a notable change in Rosengren’s rhetoric in the pursuit of normalization to the point where Rosengren is now actively suggesting an increase in interest rates in the very near future in order to promote growth in the economy, and as of the FOMC meeting on September 21st, 2016, was one of three dissenting votes (out of ten) for keeping rates low. Rosengren supports his new change of face with factors that will be discussed at length in this paper such as the pace of growth, the up-sides to higher rates, and the danger lurking in a prolonged low-rate economy. In similar (but not identical) fashion, John Williams is turning to the belief that rate hikes will be necessary sooner, rather than later if the Fed wishes to continue to spur growth in the United States economy, as opposed to letting the economy overheat into recession. Williams supports this point with evidence similar to Rosengren involving the pace of growth, the upside to higher rates, and the danger lurking in a prolonged low-rate economy. Eric Rosengren’s recent flip provides an interesting vantage point on both camps in the Federal Reserve. By comparing and contrasting the rhetoric of Rosengren (a former dove) and Williams

The Federal Reserve System is the most powerful institution in the United States economy. Functioning as the central bank of the United States, acting as a regulator, the lender of last resort, and setting the nation’s monetary policy via the Federal Open Market Committee, there is no segment of the American economy unaffected by the Federal Reserve [endnoteRef:1]. This power becomes even more substantial in times of “unusual and exigent circumstances,” as Section 13(3) of the Federal Reserve Act gives authority to the Board of Governors to act unilaterally in lending and market making operations during financial crisis[endnoteRef:2]. As illustrated by their decision making in the aftermath of the 2007-2008 Great Recession,

To begin, The Federal Reserve System opted to raise interest rates that were placed near zero years ago in order to aid the economy’s growth and prevent inflation from exceeding the target number. Several factors including: the five percent drop in the unemployment rate, and the increase in wages, and the outlook on future inflation contributed to the Federal Reserve’s decision take this action. However, the increase in interest rates in December has generated mixed results, and it appeared the Federal Reserve would announce the interest rates were going to increase again. Instead, Janet Yellen, the chairman of the Federal Reserve, announced that there were better days ahead for the economy, and a slow and careful approach to future increases in the interest rate would serve the economy best, ensuring the growth is maintained. Although the interest rates remained the same early in 2016, they are expected to increase during the June meeting of the Federal Reserve. but cited the economy needed low interest rates in order for the economy to maintain growth. I find it interesting that Yellen continues to worry about inflation growing in the coming years, although the interest rate increase should keep inflation in check through its effect of the economic markets. Yellen sites that she would like the inflation to become and stay at 2 percent each year. However, the current inflation rate is .9 percent, so the the economy is a long way from achieving its target inflation rate

Bernanke’s comment that the Fed would maintain “highly accommodative monetary policy for the foreseeable future” sparked the mood swing on Wall Street. As noted on above, this is appropriate, but what the market may be missing is what “highly accommodative” policy actually means, at least to the Federal Reserve. It is not unreasonable to think that holding interest rates near zero for the next couple of years is “accommodative”. It most certainly is. Maintaining bond purchases is also obviously accommodative policy, but there could be a subtlety in Bernanke’s likely approach. If in coming months interest rates are held at zero (which is as certain as anyone can be on any policy setting), yet the Fed starts to scale back its $85 billion bond purchases a month to $75 billion, then $50 billion and so on, there is still no question that policy is still accommodative, but a little less than it was before.

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.