Monetary policy
Monetary policies denotes the actions taken by the central bank (Federal Reserve) in a bid to influence money availability in the economy with the aim of achieving the nation’s economic goals. Performance of the monetary policy mandate was given to the Fed when the Federal Reserve Act (1913) came into place. The tools used by the Fed to perform the monetary policy obligations include the reserve requirements, open market operations and the discount rate. In order to perform the roles effectively, they are divided in that the board of governors are charged with overseeing the reserve requirement while the Federal Open Market Committee (FOMC) is in charge of the open market operations.
The direction taken by the economy to a great extent depends on the policies enacted by the fed as they alter the federal fund rates. As a consequence, the foreign exchange rates, short-term interest rates, money supply, credit availability, long-term interest rates, prices in the goods market, unemployment and the output are altered. The twelve member committee (FOMC) holds its meetings eight times a year. The objectives of these meetings at all times aims at making reviews on the prevailing economic conditions and the determination of the effectiveness of the monetary policies that are in place and propose amendments. In addition, the FOMC also makes assessments on the long run objectives towards making the prices in the economy stable and the sustainability of the growth of the economy (Federalreserve.gov, 2014).
The committee’s membership is reshuffled at the first regular meetings and currently, the committee is chaired by Janet L, Yellen. Currently, the members of the committee are Janet L. Yellen (Chair), Stanley Fischer, William C. Dudley (Vice Chairman), Richard W. Fisher, , Loretta J. Mester, Charles I. Plosser, and Daniel K. Tarullo and Jerome H. Powell.
The committee’s most recent meeting was in October 28-29, 2014 where they articulated several issues concerning the monetary policy. The following were the observations made by the committee;
- Improvement in the labor market conditions was realized as unemployment rates reduced
- The utilization of labor resources is improving from the underutilization state
- There is a moderate increase in the expenditure by the households and also on the economic activity
Taking into consideration the underlying economic conditions, the committee’s expectation that when appropriate policies are applied, there will be a moderate expansion of the economic activity. The committee also saw that the inflation will be held at a low level owing to the low prices of energy but cannot go below 2 percent. On the assessment of the labor market, there has been a significant improvement since it brought the current asset purchase program. Also, the committee saw an improvement in the strength of the economy due to an increase in the employment level as a consequence of price stability.
Decisions made by the committee
During the meeting, the committee decided to cut its spending on purchases of assets and uphold its policy of reinvesting principal payments from the agency debt and mortgage-backed securities. The matured treasury securities auction were also agreed to be rolled over so as to maintain accommodative financial conditions. The federal fund rate was agreed to be maintained at the 0 -1/4 percent with the view of supporting continuity in the progress towards achieving maximum employment and stabilizing the prices in the economy. This would be effective if the rate of inflation was lower than the 2 percent as expected by the FOMC (Federalreserve.gov, 2014).
Also, they agreed that if there were a faster progress towards the expectations in inflation and employment, the federal funds rate would be increased earlier than they expected. On the contrary, if the indicators proved that progress towards achieving maximum employment and lower rate of inflation are not in line with their expectations, then the range targeted will have to be adjusted much later when the economy respond to the policies in place. An approach that is balanced and consistent with the long-term policy goals will be taken into account when the committee will make a decision meant to remove the policy accommodation. In addition, the committee considered the fact that even after the employment and inflation come close to the planned levels, the economic conditions may make it impossible to abort the current policies. Therefore, the target rates might be kept below the level anticipated by the committee in the long run (Federalreserve.gov, 2014).
The policies were voted in by all the other board members and only Narayana Kocherlakota (current president of the Federal Reserve Bank, Minnesota) had contrary views. He believed that due to the persistence in the sluggishness of the economy, the level of the asset purchase program could have been maintained at its current level. He also had the view that the federal funds rate should be maintained at the current range for a period of one to two years after the return of the inflation outlook to 2 percent.
The next meeting to be held by the committee will be on December 16th-17th to summarize the economic projections and also a press conference by the chair on the same day (17th). (Federalreserve.gov, 2014)
References
Federalreserve.gov,. (2014). FRB: Federal Open Market Committee. Retrieved 19 November 2014, from http://www.federalreserve.gov/monetarypolicy/fomc.htm
