The Federal Reserve Monetary Policy

888 WordsDec 14, 20154 Pages
This article presents the fundamental reasons behind the Fed’s cautiousness in raising the interest rates, why it is more likely that interest rates will rise in December, and what some possible outcomes of rising interest rates could be. The Federal Reserve monetary policy exists to accomplish the goals of their dual mandate, maximizing employment and keeping prices stable. To accomplish these goals, monetary policy either changes the interest rate, namely the federal funds rate, or the money supply. Before carrying out these policies, the Fed considers economic data such as the trends in the CPI which describes the average level of inflation and various trends in the labor market . Through monetary policy, the Fed is also responsible for fighting recession. To do so, the Fed decreases interest rates but only to a certain point because nominal interest rates cannot go below zero. Therefore, it is important that the Fed return the federal funds rate back to its neutral rate before the next recession begins . The Fed had not raised the interest rates sooner because of concerns that the economy did not have stable growth to withstand the effects of an increase in interest rates. Since their efforts to fight the Great Recession, the Fed lowered interest rates to a zero lower bound, about 0-0.25%, in order to increase aggregate spending. The Great Recession is unique in that it is the only downturn since the 1970s that was not caused by the Fed and that its recovery was
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