Fed Defends Testimony To Senate Summary

Due to the diversity of Joe and Bob’s professional backgrounds, their positions on how to restore the economy will be painted by their own personal experiences. Bob, being employed by the Federal Reserve Bank, would recommend that the Federal Open Market Committee (FOMC) adjust the monetary policy. The FOMC has the power to adjust the amount of dollars in the economy and set the interest rates for banks to borrow from. (Mankiw, 2012, p.626) The Fed could seek to reduce the discount rate which would encourage banks to borrow from the Fed—thus increasing the money supply and the quantity of reserves. Additionally, with lower interest rates, banks would be more willing to lend to borrowers, which also stimulates the economy (p.633).

When the financial market is disrupted, the Federal Reserve can provide shot term credit to the financial institutions that can not find source of funding. Then the financial crisis may mitigate and the financial system could get well.

The FED decided to carry out its bond purchasing program in August to help prevent deflation (Hauser, 2011). The article could have turned out much differently if the FED did not step up and take action. In addition the FED has the authority to adjust interest rates in accordance with the current economic condition. Currently the FED is willing to curb inflation by adjusting the interest rates at a moment’s notice (Hauser, 2011). The FED’s invisible hand can sometimes help prevent major economic disasters.

According to the last Federal Reserve press release, the decision to raise the federal funds rate (3/4 to 1 percent) is due to the view of realized and expected labor conditions and inflation. The Federal Open Market Committee’s goal is to foster maximum employment and price stability. Their expectations are that economic activity will expand at a moderate pace, labor market conditions will strengthen a little further, and that inflation will stabilize around 2 percent over the medium term. Near-term risks to the economic outlook seem roughly balanced as well. The FOMC will continue to monitor global economic and financial developments and well as inflation

Throughout last year, the media were solely focussed on the differences of opinion on the Federal Open Market Committee (FOMC) between the doves and hawks as being solely about the projected increase in the federal funds rate. The baseline outlook proposed by Chair Yellen was for a glacial trajectory, but this was always subject to alteration depending on the underlying tone of incoming economic data. Since the financial crisis, however, US monetary policy has been underpinned by two separate pillars: 1) asset purchases, and 2) a zero-bound federal funds rate. Divisions of opinion between hawks and doves were evident before the onset of tapering asset purchases in 2014, and they

Today, September 21, the Federal Open Market Committee (FOMC) had an announcement released at 2:00 p.m. in which it was declared that the FOMC will keep their policies intact. I was unable to follow the announcement at the time of release, although I was informed of the decision a little before 5:00pm. I immediately checked federalreserve.gov when given the opportunity and further learned the reasoning behind the FOMC’s decision. The FOMC felt the economy is still stagnant and not growing at the rate they would like. Due to this, they kept their policies intact hoping the economy will right itself.

4). This indicates that the Fed will gradually increase the interest rate target in the coming months to sustain growth. Through normalization the Fed is attempting to decrease its balance sheet. They will do this by not re-investing matured securities, this decline is capped at $6 billion per month for treasuries and for private securities $4 billion. Yellen states “[b]y limiting the volume of securities that private investors will have to absorb as we reduce our holdings, the caps should guard against outsized moves in interest rates and other potential market strains” (FOMC 5). The gradualist aspect will allow the private sector to slowly adapt their expectations of the Fed and inflation.

At the end of the recession from 2001-2004, a period that no economic growth, the Federal Reserve recommend that interest rates stay as low as possible. The idea behind this thought was that lower interest rates would attract people to investment in housing, business loans and other areas of economic growth. The idea worked, as more and more potential homeowners entered the market, brought in by the perception that they could afford to pay monthly mortgage rates. However, in 2004, the price of oil started to rise, and the Fed responded by gradually increasing interest rates (Beese, 2008).

At last month’s Federal Open Market Committee (FOMC) meeting, Chair Yellen expressed her most upbeat assessment about the near-term path for the US economy by claiming that fiscal stimulus was unnecessary to achieve full employment. Accordingly, unemployment is expected by the FOMC to settle below its natural rate this year. Meanwhile, the current underlying sentiment amongst members appears to suggest that the economy can withstand three 25 basis points increases in the federal funds rate in 2017. This view will, however, not necessarily remain static. In December 2015, for example, the mood of the FOMC appeared to support four 25 basis points increases in its policy rate during 2016. The outcome was,

This is what happens when you ask the Federal Reserve a few difficult questions... You know, questions that they didn't get to see hours before the press conference, questions that actually get at the heart of their "policy" and matter to the people.

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.

After reading the recent statement, I now know that despite the hurricanes and the toll they took on the U.S., our economy is going good: economic activity is increases, unemployment rate has decreased, and consumption and investment has increased. The aftermath of the hurricanes will still disrupt the economy, but the effects will only last a little while. The FOMC expects the economy to continue to grow. Throughout this year, inflation is below 2 %, and the committee wants to keep it that way. Another thing that I learned, is that the federal funds rate all depends on economic activity.

| Advocates of active monetary and fiscal policy view the economy as inherently unstable and believe that policy can manage aggregate demand, and thereby, production and employment, to offset the inherent instability. When aggregate demand is inadequate to ensure full employment, policymakers should boost government spending, cut taxes, and expand money supply. However, when aggregate demand is excessive, risking higher inflation, policymakers should cut government spending, raise taxes, and reduce the money supply. Such policy actions put

The weaker-than-expected Employment Situation report for August was generally pleasing news for financial markets. Importantly, it seemed to confirm the continuation a slow growth economic equilibrium, characterised by low levels of unemployment and inflation. The short-term implication for financial markets is that the report makes it highly unlikely that the Federal Open Market Committee (FOMC) will embrace a more hawkish posture. Meanwhile, any continuation of similar reports in subsequent months will raise the ante between those FOMC members who are concerned about low inflation and those who fret about potential financial instability.

As supply falls, the prices of those securities rise and their yields decline. The effects extend to other longer-term securities. Mortgage rates and corporate bond yields fall as investors who sold securities to the Fed invest that money elsewhere. Hence, QE drives down a broad range of longer-term borrowing rates. And lower rates get households and businesses to spend more than they otherwise would, boost economic activity." The real question is what the consequences of the program are. Supporters point out that it lowered interest rates for firms and households, strengthened the stock market, stimulated job creation, and ultimately saved the American economy from a deeper recession. Critics say this temporary injection of never seen amounts of money into the economy will eventually lead to a new financial crisis, massive inflation, and has punished savers due to close to 0% interest rates. The reality is the massive increase in the monetary base has it’s clear and well known impacts, the ambiguity lies on quantifying if the positives outweigh the negative outcomes, or vice versa.