The Impact Of The Federal Reserve's Control On Monetary Policy

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.

During the Federal Reserve meeting in April 2016, the range was left unchanged for federal funds at 0.25 percent to 0.5 percent (TRADING ECONOMICS, 2016). Labor markets experience growth confirmed by policy makers, yet economic activity was monitored as being slow (TRADING ECONOMICS, 2016). The risks associated with the financial developments of the country have ceased (TRADING ECONOMICS, 2016). The average percentage of interest rate in the U.S. averaged at 5.8. March of 1980 a record high was recorded at 20% (TRADING ECONOMICS, 2016). The lowest interest rates were recorded in the month of December 2008 at 0.25% (TRADING ECONOMICS, 2016).

During the Federal Reserve meeting in April 2016, the range was left unchanged for federal funds at 0.25 percent to 0.5 percent (TRADING ECONOMICS, 2016). Labor markets experience growth confirmed by policy makers, yet economic activity was monitored as being slow (TRADING ECONOMICS, 2016). The risks associated with the financial developments of the country have ceased (TRADING ECONOMICS, 2016). The average percentage of interest rate in the U.S. averaged at 5.8. March of 1980 a record high was recorded at 20% (TRADING ECONOMICS, 2016). The lowest interest rates were recorded in the month of December 2008 at 0.25% (TRADING ECONOMICS, 2016).

The Federal reserve needs to increase interest rates in the next year in order to reduce inflation. With low unemployment, the government is placing strain on the economy by lowering taxes and increasing spending. When the economy reaches its maximum output, prices increase while output remains the same. This could be what is happening now, with economic overheating on the horizon. However, the Federal Reserve could stifle this inflation by hiking interest rates over the next year. This would decrease the money supply and thus reduce inflation to its targeted level. It would also provide some leverage for the Fed to lower rates in the case of a recession.

This report discusses the association between the Federal Reserve System and U.S. Monetary Policy. It mentions that the government can finance war through money printing, debt, and raising taxes. It affirms that The Federal Reserve is not a government entity but an independent one. It supports that the Federal Reserve’s policies are the root cause of boom and bust cycles. It confirms that the FED’s money printing causes inflation and loss of wealth for United States citizens. It affirms that the government’s involvement in education through student loans has raised the cost of a college education. It confirms that the United States economy is in a housing bubble, the stock market bubble, bond market bubble, student loan bubble, dollar bubble, and consumer loan bubble. It supports the idea that the Federal Reserve does not raise interest rates because of the fear of deflating the bubbles they have created in recent years.

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

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 Funds rate is one of the most influential interest rates in the U.S. economy, since it affects monetary and financial conditions, which has bearings on key aspects of employment, growth and inflation” (Phoenix). Unfortunately, changes in the federal funds rate produces a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the quantity of money and credit, and, eventually, a range of economic variables, including employment,

In the early September statement, Governor Lael Brainard also rejected the need for a federal funds rate hike stating that “the low neutral rate looks likely to persist.”(p.8) The Governor explained that in this economy, monetary policy should remain “modestly accommodative” because of sluggish ½ percent average productivity growth over the last five years, weak foreign consumption and

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.

This consequently puts monetary policy firmly on a discretionary footing. By contrast, monetarists have always denied that a long-term trade-off between unemployment and inflation exists due to the neutrality of money. The existence of any inverse relationship between the former and latter is captured by the natural rate of unemployment. The Fed’s estimate for this key metric had been revised down earlier in the summer to 5.1%. The release of the economic projections used at last week’s FOMC meeting indicates that this measure has, once again, been lowered to 4.9%. A few weeks ago, I argued that the case for the Fed raising its policy rate this month depended critically on the conviction of its estimate of the natural rate. Thus, it appears that continued weak wage inflation has convinced the FOMC that 5.1% was too high an estimate. The current stance of policy has, therefore, scope to remain intact. The big issue for financial markets is just how much more leeway the Fed will provide in keeping conditions accommodative. The recent behaviour of inflationary expectations has clearly been noted by the FOMC. Fed Chair Yellen admitted that the decline had made achieving the 2% medium-term inflation target more difficult. The drop in expected inflation may have also driven the FOMC to lower their estimate of the natural rate of unemployment. This will, however, be breached by 2016 Q4. The

Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed

Ideally, members would like to see lower levels of U6 labour market underemployment, but they are also cognisant of the need to make a pre-emptive strike against a build-up in inflationary pressures without damaging labour demand. Fed officials have been warning financial markets to expect a faster pace of tightening in 2017 versus last year. Policy changes need, however, to be put into context. The FOMC’s current baseline economic outlook would suggest 2 or possibly 3 rate hikes during the year. These would happen in June and December, along with September if there are 3 hikes. Meanwhile, markets have become jittery about whether the FOMC plans to boost the number of rate hikes this year. Ultimately, unfolding economic data will determine any changes to the FOMC’s baseline economic outlook, and, consequently, the forward policy path. To justify an increase in the federal funds rate being brought forward from June to March, the FOMC will need to play a hunch about evolving economic data, as well as potential developments in the realm of fiscal policy. Furthermore, members also need to decide whether unfolding economic data risks blowing the Fed off course in achieving its dual mandate without resorting to a faster pace of tightening.

In November 2010, the second stage of quantitative easing announced. The Fed continues to purchase long-term bonds for $600 billions. [1] This action caused the bubble in the US currency. Many of the counties started to own fewer US dollars, and acquired more gold and natural resources. As the results, in 2010, the price of gold and gas were gone up by close to 28%, and the US currency started to depreciate. [1] In September 2012, the Fed announced that they would continue to buy long-term bond at $85 billion per month, but at the same time the Fed would start to sell their short-term bond. [1] By selling short-term bonds, it would lower the long-term market interest rate and decrease the earnings of the long-term bonds. As we can see, the reason Fed continuously used quantitative easing, as monetary policy in recent six years is their goals that have not reached. Even though, the Fed increased rapidly on the monetary base, the multiplier was decreased more than the increasing on the monetary base. As the results, the money supply was still shrinking, and the economy was still in recession. However, in 2013, the Fed announced that they would continue to increase the money supply until the unemployment rate falls below 6.5% or the core inflation rose above 2.5%. [1] By doing this, the Fed continues to increase the inflation rate, and depreciates domestic currency. With higher inflation rate, the real deficit would be dropped.