When the Federal Open Market committee met in September, information was released suggesting that the economic has expanded moderately in the past recent months. The unemployment levels remain high while the employment rate remains deprecated. The growth in business has decreased while household spending are increasing. It also revealed that inflation has picked up hence the increased energy prices. The Fed is, therefore, concerned that the economic growth may not be in a strong position, to improve the labor market conditions unless sufficient policies are implemented. They are also concerned that inflation will run under its 2% objective due to the strains being experienced in the market globally.
The Federal committee is looking to stabilize the market prices and increase the employment rates. With a proper policy accommodation in place, the committee is expecting the economic growth to increase its recent pace while the unemployment levels declines gradually. The committee is also planning to move the inflation back to its main objective as it could cause a major problem, in the country’s economic performance when it is below 2 percent. It will monitor to incoming economic and financial information in the coming months, and continue to procure the Treasury mortgage backed security and implement other policies until the labor market has improved significantly.
The federal committee decided to maintain the target range for the federal funds at 0 to ¼%. The committee made a decision to maintain the rate and hopes that the low rate will be suitable provided the unemployment rate does not go below 6-1/2%, the inflation rate between one and two years to be more than the committee’s 2% goal and the inflation goals continue to be fully supported.
The Open Market operations are one of the ways the Federal Open Market Committee uses to achieve its monetary policy objectives. The committee performs open market operations with government securities with which it has an established trading relationship. When the target is the uncollateralized lending rate between fed banks, the committee will operate in the collateralized market with primary dealers or repo. Open Market operations that the fed committee engages in can be divided into two types: permanent and temporary. The permanent types are used to accommodate long term factors that expand the economic growth. They involve absolute purchasing of securities for the System Open Market Account (SOMA). Temporary types, on the other hand, are used to address transitory needs. The need may either be Repurchase agreements (Repos) or reversed repurchase agreements (reversed repos). A repo is equivalent to a collateralized loan and the difference between purchases and sales equals interest.
When a repo operation is being announced, the announcement will include the closing time for the auction, the repo and the operation terms but does not include the size of the operation. This is announced later once the operation is complete. The propositions from the dealers are evaluated according to their competitiveness. The permanent operations follow the same procedure as that of the repo. The size of the operation is announced later after the operation is complete. The announcement will, however, include the maturity range of the operation and a list containing excluded securities from the maturity range. The operations are open for thirty minutes unlike in repo where it is open for ten minutes. Once the dealers have bid on the securities, they are compared, and the ones with the best rates are accepted.
Works Cited
Federal Reserve Bank of New York. Open Market Operations. New York Fed. 2013. 27th Nov
2013
< http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html>
Federal Reserve System. Open Market operations. 2013. 27th Nov 2013
< http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm>
