The Federal Reserve's Current

THE FEDERAL RESERVE'S CURRENT

MONETARY POLICY

The Federal Reserve Monetary Policy is the responsibility of the FOMC (Federal Open Market Committee), created when President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913. (FRB) It took almost a year to establish the twelve regional Reserve Banks and to determine its boundaries.

The FOMC is responsible for formulation of a monetary policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments (FRB). The twelve districts include Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. They meet eight times a year in Washington, DC. The committee is made up of one President of the Federal Reserve Bank of New York, four other reserve bank Presidents who serve in rotation and contribute to the Committee's discussions and deliberations, there are an additional seven board members of the Board of Governs. The Directors of each Reserve Bank also make recommendations about appropriate discount rates that the Governors have final approval over. (FRBSF)

On February 1 2006, Alan Greenspan retired after 18 years of economic service the United States, but not before he pushed through a small short-term interest rate increase and insinuated that the rate increases would be coming to an end. His successor as Chairman, Board of Governors Federal Reserve System Committee, Ben Bernanke could face a time of substantial risks that increase the chances for serious missteps. According to Laurence Meyer, a former Fed governor, Ð''the challenge is in making day-to-day policy at a time when mistakes are most likely to be made. We are close in many ways to a soft landing. But that's really a razor's edge' (Andrews 2006).

According to Mr. Bernanke who testified to Congress on the present Federal Reserve's Monetary Policy on February 16, 2006 the economy in 2005 was impressive. "Real gross domestic product (GDP) increased a bit more than 3 percent, building on the sustained expansion that gained traction in the middle of 2003. Payroll employment rose 2 million in 2005, and the unemployment rate fell below 5 percent. Productivity continued to advance briskly. The economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply. The Gulf Coast region suffered through severe hurricanes that inflicted a terrible loss of life; destroyed homes, personal property, businesses, and infrastructure on a massive scale; and displaced more than a million people. The storms also damaged facilities and disrupted production in many industries, with substantial effects on the energy and petrochemical sectors and on the region's ports. Full recovery in the affected areas is likely to be slow" (Bernanke 2006).

In addition, with the "economy expanding at a solid pace, resource utilization rising, cost pressures increasing, and short-term interest rates still relatively low, the Federal Open Market Committee (FOMC) over the course of 2005 continued the process of removing monetary policy accommodation, raising the federal funds rate 2 percentage points in eight increments of 25 basis points each" (Bernanke 2006).

During the January 31, 2006 meeting "the FOMC raised the federal funds rate another 1/4 percentage point, bringing its level to 4-1/2 percent. Additionally, the federal level, the budget deficit narrowed appreciably in fiscal 2005. Outlays rose rapidly, but receipts climbed even more sharply as the economy expanded. However, defense expenditures, hurricane relief, and increasing entitlement costs seem likely to worsen the deficit in fiscal 2006" (Bernanke 2006).

Also, at the January meeting the FMOC provided projections for 2006 and 2007. The disposition of the FOMC projects 3-1/2 percent increase in the real GDP during 2006 as well as an additional 3 to 3-1/2 percent in 2007. Unemployment rates are anticipated to be between 4-3/4 to 5 percent by the end of 2006 and remain steady in the beginning of 2007. Core PCE (personal consumption expenditures) are expected to rise around 2 percent in 2006 and about the same percentage rise in 2007 (MPR, see attachment 1).

A summary of current economic conditions in each District are compiled from information elicited from reports from Bank and Branch directors, interviews with key business contacts, economists, market experts, and other outside sources, these reports are then submitted to each District Federal Reserve Bank and is compiled by a designated Federal Reserve Bank on a rotating basis. This report is commonly called the Beige Book. The following are excerpts from the April 2006 Beige Book compiled by the Federal Reserve Bank of Boston:

Consumer Spending and Tourism - majority of Districts report overall retail sales improving. Auto sales were mixed across the Districts with many stating that sales of imports and used cars are stronger than new domestic vehicles. Most of the reports on travel and tourism are positive (Beige Book).

Services Industries - All Districts reporting on nonfinancial services note increased activity during the first quarter relative to a year ago. Health-care services expanded in some districts along with mixed conditions in information technology services as well as transportation services activity improving this quarter (Beige Book).

Manufacturing - Reports on manufacturing activity remain positive. Some Districts describe shipments and orders as continuing to strengthen--significantly in some cases and gradually or steadily in others. Several report strong or expanding production of steel, construction inputs, machine tools, aircraft equipment, and food. Updates on auto assembly and parts production were mixed as well as trends in apparel-making. Labor demand in the manufacturing sector was reported as mixed, most report some form of pickup. District reports on capital spending tend to be either modestly positive or mixed (Beige Book).

Real Estate and Construction - Residential construction is more regionally differentiated than overall residential sales and prices. Commercial real estate appears to be positive across the reporting Districts, and with