The Federal Reserve Policy From 1999 To The Present:
Essay by 24 • April 9, 2011 • 1,681 Words (7 Pages) • 1,395 Views
The Federal Reserve Policy from 1999 to the Present:
The monetary policy of the United States has two basic goals that are outlined in a 1977 amendment to the Federal Reserve Act. These basic goals are: to promote "maximum" sustainable output and employment while promoting "stable" pricing [1]. It has become the responsibility of the Federal Reserve Board to try in:
* Maintaining the stability of financial systems and contain risk that may arise in financial markets.
* Regulating banking to ensure safety and soundness protecting the consumer from harm while using credit and banking services.
* Overseeing the nation's payment systems providing financial services to financial institutions, the U.S. government, and foreign institutions.
* Stabilizing world pricing and creation sustainable employment.
While the Federal Reserve Board is in a constant challenge to perform these above tasks. The economy goes through business cycles where the output of goods and services and the employment rate of the country are above or below their long - running levels. The term "monetary policy" refers to what the nation's central bank or Federal Reserve happens to administer so that they may influence the amount of money and credit in the U.S. economy. What happens to this money or the credit during this time will directly affect the interest rates and the performance of the U.S. economy and its people.
Stabilizing the U.S. economy has become paramount for the Federal Open Market Committee (FOMC) and in 1999 the economy grew by 4 percent while largely containing inflation [3]. This does not mean that inflation had no increases during this period. Matter of fact, the overall rate of inflation did increase and this could be directly tied to the higher energy prices of that year. This as you can imagine made forecasting for the year a little challenging for the Federal Reserve and when they met at their semiannual meeting the decision was made to leave the federal fund rate with minimal increase. This decision I believe was largely in part to the surprising recovery of the foreign economies plus the leveling of the U.S. dollar [3]. Nonetheless with so many uncertainties associated with the time the Committee decided to leave things as they had for most of the year and started concentrating on the upcoming 2000 calendar year.
Rapid growth and extraordinary performance showed signs of continuing in 2000. This meant that the Federal Reserve was in a position to comfort a complex set of issues that would best sustain the strong and long running growth of the U.S. economy. These positive turns to the economy could be directly linked to the technological advances that boosted the growth rate of production potential [3]. Though there had been several positives being witnessed in 2000 the economy did show signs that the growth in household spending slowed considerably since 1999. Some members of the Federal Open Market Committee (FOMC) believe that this slowing was a temporary pause before it rebounds again later in the year. Others attribute the slowing of consumer spending to the reduction of wealth through the spring and summer months. Another factor for the slowdown in spending could have been due to the rising debt that has been burdening households during the 2000 calendar year. Given all of the above information the Committee believes that economic growth in the coming year would be moderate [3]. This assumption from the Fed inspired them to raise the rates to a relatively higher level of .50 base points so that it would counter the imbalance that they were projecting. In doing so the FOMC also decided to analyze whether they should adjust or purchase some assets that the Federal Reserve Act already authorizes the Federal Reserve to move on. Last but not least in the closing days of 2000 the FOMC decided to study whether they should approach Congress to request authority so that they may be able to acquire assets via open market operations that were outside their control.
Moving into the 2001 session many opportunities had shifted and slowed sharply following extraordinary growth. By administering the monetary policy early in the year the Federal Reserve was confident that they were laying the groundwork to achieve maximum sustainable growth [4]. A large part of this stance of the monetary policy was to help keep inflation at a modest rate plus ease energy prices for the American consumer. The uncertainties surrounding the current economic situation in America were considerable and until the Federal Reserve was confident that their actions were right they feared that the economy would weaken even further. Still, the FOMC opted for a smaller policy move because they believed that policy actions would ease things that they were seeing. As a consequence of the policy actions that the FOMC initiated and tax cuts that were under way, Real interest rates were down and helping a tight economy. Not only was this a positive but incoming data also showed that economic activity has been turning from negative to a more mixed outlook. This mixed outlook was something that the Federal Reserve had been banking on which would stabilize once consumer spending picks up and technology helped lower the cost of manufacturing.
Unfortunately, the events of 9/11 hurt the rebounding of a strong world economy not only an American one for 2001 and 2002. Across the board spending was down, manufacturing of durable goods was down and unemployment was up. In considering policy actions for the year 2002 the Federal Open Market Committee (FOMC) recognized that the stance in policy from last year would not prove reliable in 2002. This was based upon the change in sustainable growth and price stability. Inflation though was currently contained with few signs of an upward pressure that would likely develop any time soon. This on top of the vigorous steps from retailers manufactures and wholesales to eliminate unwanted buildup of stocks brought inventory levels better aligned with expected sales. However, as inventories start to grow more in line with sales, the contribution of inventory investment to real GDP numbers should lessen. This was all on account of monetary policy which also played a role by cutting short - term interest rates, which helped lower household borrowing cost [5]. All of this plus consumers having lower level of mortgage interest rates which allowed for refinancing, borrowing against their homes and purchasing homes for new ownerships
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