Federal Reserves Current Monetary Policy
Monetary policy
This is the process through which the monetary authority of a country controls the supply, availability and the cost of money in an economy. The main aim of a monetary policy is to create economic growth and stability of a nation (Jones, 2002). The tools used in a monetary policy are either expansionary policy or the contractionary policy. An expansionary policy is used to expand the supply of money in an economy while the contractionary policy reduces the money supply. Open market operations are used as the main tool for executing monetary policy. The amount of money circulating in the country is regulated through the monetary policy. There are financial instruments used in regulating the amount of money in supply in the economy. Such instruments are treasury bills, company bonds and foreign currencies. To the contrary, the fiscal policy uses government tools to regulate the economy of a country. Such tools are the government expenditure, government borrowing and others (Grivoyannis, 1999).
In the United States, the Fed established the Federal Open Market Committee (FOMC) to make the monetary policies for the country. FOMC members meet every six weeks to set the fed funds rate. FOMC has currently set a fed funds rate of between 0 and 0.25 percent. The low rate has been maintained due to the low GDP growth rate and the unemployment that have affected the economy since the year 2007. A contractionary monetary policy has been maintained by the FOMC to ensure economic recovery after the 2008-2009 economic meltdown (Beckner, 2008).
There are several current key economic indicators that Fed reported on January 27 this year. The inflation rate CPI-U increased by 0.1 by the end of last year. The price index for all items increased by 0.1 last year. Fed has also reported that the unemployment rate has remained at 10 percent. The industries which had reduced employment rates were construction, manufacturing and wholesale trade. The sectors which increased employment are the help services and health care. Towards the end of the financial year 2009, the real GDP increased at a rate of 2.2. Federal funds rate will be maintained at a rate of 0 to 0.25 percent in 2010 (Beckner, 2008).
The meeting held on 27th January 2010 by FOMC was optimistic that the US economy is to recover from the recent problems which have affected the global economy. The monetary policy established by FOMC was to increase the availability of money and reduce the cost of borrowing money to increase the accessibility of capital to investors. The aim of the monetary policy is to promote the economic goals of the nation (Nowak, 2007).
The Employment Act of 1946 established the economic goals of the nation. The act suggests that the economy of the US has the goals of promoting maximum employment, production as well as purchasing power of the people. The Fed was given the mandate to establish the monetary policy by the Federal Reserve Act of 1913. FOMC has reported that the economic activities have started to increase since the beginning of this year. It has also stated that employment has increased but has not yet reached a sustainable level. Household expenditure is increasing at a good rate but has been affected by the weakness in the labor market. Other factors affecting the expansion of house hold expenditure are low housing wealth, moderate income growth and the tight credit in the economy. Expenditure by businesses on equipment and software is increasing. Employers are still reluctant to increase more employees into their systems due to the fear of another economic crisis. Sales and inventory have been improved by many organizations since the year 2008. The banks have continued to reduce their lending activities after the 20072008 economic crisis which hit most of the banks. However, the financial market conditions have supported economic growth over the period. The rate of economic recovery has been moderate. FOMC has anticipated a gradual economic recovery over time through the stability in the prices for many commodities (Nowak, 2007).
FOMC suggests that labor market has started to increase and that expenditure in household expenditure has increased moderately. The expenditure on equipment and software has continued to rise up while the inventory stocks are being aligned with the sales. FOMC anticipates a low chance for inflation to occur in the near future. However, the labor market still remains weak and income growth is low. Other current negative aspects about the monetary policy are that the housing wealth has remained low and that credit is still tight. Investors have reduced investment in structures. Employment is constant since employers have stopped to hiring (Shull, 2005).
The policy action by the committee is to maintain the economic status the same. FOMC has resolved to maintain the interest at a range of between 0 and percent for the financial year 2010. It is anticipated to increase the rate when the economic conditions will improve. New policies will continue to be formulated to enhance the lending capacity and the growth in the housing market especially after the economic meltdown of 2008. The Fed has resolved to purchase 1.25 trillion agency mortgage securities. 175 billion of agency debt will be repaid by the Fed to create stability in the mortgage market. The committee will carry out these transactions moderately to ensure a good transition in the mortgage market. To support financial stability and economic growth, Fed has decided to wind down its Term Auction Facility. The strategies involved offering 50 billion in 28-day credit on 8th February. 25 billion in 28-day credit is scheduled to be offered on 8th March (Beckner, 2008).
The policy statements are voted upon by the FOMC members. Unlike in the past meeting where the voting on the federal funds rate has been unanimous, during the recent meeting, only one member voted. This is because the members feel that there has been a sufficient change in economic and financial conditions in the recent years. The FOMC members feel that the extension of the 0 to federal funds rate is not sufficiently enough due to the major financial and economic changes that have taken place in the economy. The low fed funds rate should not last for a long period of time and FOMC should adjust this rate (Shull, 2005).
The economic meltdown of 20082009 required the Federal Reserve to intervene. The crisis had been caused by subprime mortgage lending which created huge losses to banks after many debtors defaulted. The mortgage sector has been adversely affected by the crisis and fed has taken adequate procedures to ensure the industry has retained its position. The monetary policy issued by FOMC during the latest meeting had the agenda to reconstruct the mortgage industry (Beckner, 2008). The banking industry was also affected by the crisis and fed has established measures to reconstruct the industry. FOMC has established favorable interest rates to the banks to allow them pick up after the crisis. All financial institutions have been regulated to avoid similar crisis in future (Beckner, 2008).
The policy actions discussed by FOMC during the 26-27 January 2010 meeting were to adjust fed fund rate target, that is, whether to increase, decrease or remain the same. The rate was maintained as before, 0- percent. During the meeting, fed suggested several reasons to maintain the low fed funds rate target as low as possible. The reason was the persistent economic weakness the country has experienced over the past years. FOMC has stated that the economic recovery is moderate and a strong recovery will be achieved in the near future. To increase the funds to the banks for issuing loans, FOMC suggested that the government should buy government securities. Federal Reserve has mostly used open market operations to promote its monetary policies. The main target of FOMC is to maintain the fed funds rate as low as possible (Beckner, 2008).