Monetary Policy Paper "Monetary Policy is the most significant function of the Fed; it is probably the most-used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent monetary policy will also be discussed.
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank,
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Federal government consumption and investment the part of spending that is counted in GDP rose more than 7 percent in real terms in 2002. (Government spending on items such as interest payments and transfers are not counted in GDP because they do not constitute a direct purchase of final production). Reflecting an unchanged stance of monetary policy over most of last year, short-term market interest rates moved little until early November, when the FOMC lowered the target federal funds rate 1/2 percentage point, and other short-term interest rates followed suit. The Federal Reserves concerns are many; because of the economic diversity of our country. In November 2002, the fed reduced the targeted federal funds rate 50 basis points, to 1.25 percent. The policy easing allowed the Committee to return to an assessment that the risks to its goals were balanced. The Fed has inflation expectations well contained, and the additional monetary stimulus seemed to offer worthwhile insurance against the threat of persistent economic weakness and substantial declines in inflation from already low levels. 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
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 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
Federal Reserve Chairman Ben Bernanke 's meeting dealt mainly with the issues that could stabilize the economy after the great recession. After creating a number of policies to fight the 2008 crisis, Chairman 's move to further reduce Quantitative Easing was a bit of a disappointment. The Fed will reduce its purchases of long-term Treasuries and mortgage-backed securities by another $10 billion a month. Apart from this, Fed is going to concentrate on maximizing employment rates, stabilizing prices and interest rates.
The aim of this paper is to describe the most used Federal Reserve monetary tools and activities. To further entail other requirements, this paper is aimed to at least 2-page length, font size 12, double spaced, Bookman Old Style font, and lastly include a reference list.
In order for the Federal Reserve to fulfill their goal of moderate long term interest rates, stable prices and maximum employment, they rely on developing strategic changes to the monetary policy. Through monetary policy changes, the Federal Reserve can either restrict or encourage economic growth and inflation, thereby molding the macroeconomy into a state of consistent health. Overall, there are three tools used to modify the monetary policy, they include reserve requirements, discount rates, and open market operations. In an effort to promote price stability within the economy, these tools influence monetary conditions by affecting interest rates, credit availability, money supply and security prices. While one tool is use more frequently than the others, all three are necessary in establishing stable economic conditions.
To stabilize the economy bonds are used which release money into the market. The responsibility of the Central Bank is to maintain the health of the banking system and regulating the purchase and sale of bonds. The interest rates are controlled to balance the markets. According to the Monetary Policy Report to Congress, “The Federal Open Market Committee (FOMC) maintained a target range of 0 to ¼ percent for the federal funds rate throughout the second half of 2009 and early 2010” while representing forecasted economic decisions to rationalize low levels for longer times on the federal funds rate (Federal Reserve, 2010). Purchases were still being made by the Fed’s to result in improvements to the economy through focusing on mortgages, the real estate market, and the credit market. Predictions by the Federal Open Market Committee depicted low levels on the federal funds rates in early 2010 which would continue for some time while over time the economy would see growth, a rise in inflation, and a decline in unemployment. Feds were in agreement though they expected the recovery process to be slower. Purchases by the Federal reserve were slowed, “$300 billion of Treasury securities were completed by October” and “the purchases of $1.25 trillion of MBS and about $175 billion of agency debt” were suppose to be finished the first quarter of 2010 (Federal Reserve, 2010).
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.
The last five years have shown that traditional monetary policies predicated on interest rate management by the Federal Reserve no longer deliver the economic growth they were once believed to. Keynesian economics has proved to not be as effective as once thought, which has led to the Federal Reserve choose alternative means to stimulate the economy and indirectly manage exchange rates (Hakkio, 1986). The uncertainty over interest rate polices has fortunately not led to increases in inflation, which has typically been the case in the past (Kopcke, 1988). The current economic conditions and the approaches the Federal Research are taking however are cause for concern, and from a personal standpoint many decisions are being evaluated more precisely.
“The Central Bank also raised concerns about the Feds lower interest rate encouraging rising demand for junk bonds and risky real estate investments and shifts in bank balance sheets as areas of concern. Mr. Bernanke said the Fed took these concerns very seriously and noted the central bank had significantly widen its efforts to monitor financial markets as well as greater priority to financial
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
Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by
Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.
“FOMC began to raise the target federal funds rate in June 2004. This guidance was designed to influence asset prices, economic activity, and inflation in a manner consistent with the goals of price stability and full employment. “(2)
Leadership at the Fed has, once again, been found wanting. After indicating in her Jackson Hole speech in late-August that the case for a higher policy rate had recently strengthened, Fed Chair Yellen has flip-flopped and sided with the dovish members of the Federal Open Market Committee (FOMC). Her credibility as an effective communicator for the entire FOMC has, therefore, been compromised. Additionally, there are now clear signs of rising dissent amongst FOMC members, something which financial markets will have noted. The 20-21 September policy meeting released updated economic and federal funds rate projections and they indicate that the majority of members expect just one rise in the policy rate in 2016. This constitutes a downgraded assessment since June’s forecasts when two increases were projected. Meanwhile, expectations of rate hikes in 2017 have also been scaled back to two compared with three back in June. Furthermore, the anticipated terminal level of the federal funds rate has been modestly reduced to 2.875% from 3%. Given the continued projection of a long-term 2% inflation target, this implies that potential real GDP growth has been scaled back. The FOMC has duly obliged with a downward revision to 1.8% from 2%. Last week’s meeting concluded with the highest level of dissent since 1992. Fed Chair Yellen indicated that discussion was dominated about the timing of the next rate hike vis-à-vis whether a higher policy rate was