Abstract
The Federal Reserve release report, previously known as Humphrey-Hawkins report, is based on the economy and the direction of monetary policy. This report gets released twice a year before the congress. In this document we will focus on whether this report is influenced more by inflation or by the possibility of an impending recession. This document also discusses the monetary policy and its direction as stated in this report.Introduction
The Federal Reserve Banking system also considered as the ‘lender of last resort’ provides support to major financial institutions whenever they are in dire situations or when the market is instable. It does so by providing adequate liquidity. The main purpose of the monetary policies is to maximize employment, stabilize prices and moderate long-term interest rates.
Federal concern over inflation or possibility of recession
Inflation is defined as the sustained raise in general price level over a period of time. According to the 1977 amendment of the Federal reserve Act the monetary policy has two basic goals - sustainable output and stable prices. Stability of price means maintaining a low inflation environment which the Federal Reserve has focused by developing a new tool called Inflation Rate Targeting. It announced a moderate inflation of 2% followed by an expansionary monetary policy through lowered interest rates. However, to maintain this moderate inflation rate the Fed Reserve may end up purchasing more mortgages and treasury securities at auction. This may create a downward pressure on the interest rate. So Federal Reserve is more concerned about inflation and the measures taken to achieve the short– run performance of the economy.
Recent direction of monetary policy
In the recent report submitted to the Congress the Federal Reserve aimed at price stability and maximum employment. This is achieved by keeping the inflation rate quite low at 2%. The Federal Reserve for a long period has kept the federal funds rate (0 - ¼) quite low to keep the interest rate low. It may help to reduce the employment rates.
Policy actions to confirm that direction
The Federal Reserve uses the open market operations as the primary tools for implementing the monetary policies. Through this tool fed controls the supply of bank reserves and deal with purchase and sale of Government bonds and securities. The Open Market Operation influences in stabilizing the prices and sustainable economic growth. The Fed funds rate is the cost of borrowing from other banks and the target of funds rate is maintained by open market operations. Another tool is the discount rate (interest rate charged by the fed to banks that borrow from it to meet the temporary needs for reserves) which is slightly higher than the fed funds rate. Recently the Federal Reserve came up with Comprehensive Capital Analysis and review program (CCAR) to meet the capital adequacy requirements for major banks. These policies help the Federal Reserve to achieve its goals.
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