Determining A Path For The Fed After The End Of Qe3

The federal reserve has raised interest rates five times in less then twelve months, and the pervious raises are just barely beginning to take effect. The previous raises averaged around a quarter percentage point, and since these raises failed to slow the economy, Greenspan, unable to take anymore chances doubled the previous with a promise of more to come.

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.

The federal government reacted to the financial crisis that emerged in 2007 and affected industries in many ways. This crisis caused an economic meltdown that saw a lot of people lose their jobs, homes, and savings. The Federal Reserve implemented several solutions that were designed to improve the liquid assets of the financial institutions and create favorable conditions in financial markets. These solutions resulted in changes to the Federal Reserve's financial records. The solutions were enforced so as to fulfill the Reserve’s objectives on financial policies which involve employment and price inflation.

The primary objective of the Federal Reserve is to stabilize the monetary environment. The Federal Reserve has focused on achieving price stability and maximum employment while avoiding a recession. Within the goals of the dual mandate, the Fed encourages a target inflation rate of 2 percent and the unemployment rate between 4.5 percent and 5.0 percent to maintain a healthy economy. As of today, the inflation rate is 2.3 percent and the unemployment rate is 4.2 percent.

In the time period shown in the BEA release highlights document (2015, bea.gov), it is clear that real GDP increased 2.0 percent in the third quarter of 2015, according to the third estimate by the BEA. The document also states that the main driver of the increasing GDP is the rise in consumer spending on

Just a few days ago, the Federal Reserve increased the federal funds rate from 1.25% to 1.5%. The federal funds rate is one method that the Federal Reserve uses to control monetary policy. The other methods used by the Fed to control monetary policy are open-market operations, and the discount window. The federal funds rate is defined as the interest rate that banks charge each other to lend reserve funds. The federal funds rate is usually than the discount rate so that banks are more inclined to go to other banks first, rather than the Fed. During the recession in 2008, the federal funds rate was near 0 in the hopes that banks would lend more, and the economy would be kickstarted. However, as the effects of the

Reduction in real exports (real imports, which are a subtracted in the GDP calculation declined as well), accounted for a significant portion of the economic decline, followed by a decrease in inventory investments, non residential fixed investments, residential investments and a cutback in state and local government spending. The GDP 's only supporter so far this year came in the form of increased real personal consumer expenditures, which grew from 2.1 percent from the previous estimate of 2.0 percent, mainly reflecting sharp increases in services and slight increases in other areas. The BEA states, "The downturn in the percent change in real GDP, primarily reflected a downturn in exports, a larger decrease in private inventory investment, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending" (2014). The table below, prepared by the BEA, shows precisely which components of GDP rose and tumbled in Q1 2014.

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.

The Federal Reserve has set the current interest rate a 0.13, this number is unchanged from the previous week (Board of Governors of the Federal Reserve System, 2015). The current trend for the year 2015 is that the interest rate is beginning to slowly increase (Board of Governors of the Federal Reserve System, 2015). The inflation rate has remained at 0.1 or less for the year 2015, the latest inflation rate was release on June 2015 and was calculated at 0.1 (Coinnews Media Group, 2015). This was the first time in 2015 that the inflation rate has increased. Previous months were either negative or unchanged (Coinnews Media Group, 2015). However, this is an increase from the previous month. The interest rate and inflation are inversely related,

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.

The current rate of GDP growth, according to the Bureau of Economic Analysis, is 2.7% (for Q3), and it was 1.3% in Q2 of this year. This rate reflects relatively slow growth, with challenges remaining in the domestic market and with sluggishness in Europe suppressing exports to that region. The rate of GDP growth is predicted to slow to a decline of 0.5% between Q4 2012 and Q4 2013, the US re-entering recession, according to the Congressional Budget Office's projections. These projections are based on the provisions of the Budget Control Act being enacted, though any observers are doubtful that this will occur.

During the financial crisis in 2008, the Central Banks (CB) tried to repair the economy by setting in action an open market operation (OMO). An OMO is where the CB buys short-term bonds to increase the money supply. The CB’s across the globe had to use a monetary policy instead of a fiscal policy, partly due to countries sovereign debt problems . The CB’s were buying short-term bonds until the real interest rate fell to zero. When the real interest rate fell to zero it created liquidity trap. And CBs had to look to unconventional monetary policies to create a higher output. This paper will seek to answer if unconventional monetary policies, specifically quantitative easing (QE), were effective on the economy or not. First, this paper will explain what liquidity trap and how it is relevant. Second, it will explain how QE work. Third, it will conclude if QE were effective or not. To question whether QE were effective or not it will use the American economy. This paper will illustrate liquidity trap and QE by using the models: MS-MD, IS-LM and AS-AD.

* (December 20, 2012). GDP GROWTH ACCELERATES IN THIRD QUARTER. Bureau of Economic Analysis. Retrieved on January 25, 2013 from http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_3rd_fax.pdf

At December 16, 2015, the market witnessed the first time that the Fed hiked the interest rates since 2006. Federal Open Market committee (FOMC) lifted the target range for the Federal funds rate to ¼ to ½ percent. Initially, this paper outlines the core marks from December 2015 meeting statement and compares them to the one from January 2016 meeting statement. Later, this paper acclaims Fed’s decision and illustrates appurtenant reasoning, based on multiple data sections ranging from labor market, price level, and economic condition. Then, this paper characterizes market performance in the aforementioned sections after the rate hike and deduces how it impacts rate decisions down the road. Eventually, the paper provides a conclusion using facts from current events, newly released Fed Chair Speech, and the analysis of alternations in FOMC voting members so as to determine further possible movements of interest rate.