Federal Reserve Board MeetingFederal Reserve Assessment of the current economic activity and financial markets.In the past years, the economy has been experiencing some crisis with little recovery leading to financial crisis. Because of this, the Federal Reserve assessed the most three major economic factors which are economic growth, inflation and unemployment rate. Because of the inflationary crisis, there was need to encourage economic growth and some job creations by keeping short-term interests to nearly nothing and also to lower the long-term rates to zero such as purchases of mortgage-backed securities, treasury securities and government agency debt hence leading to economic recovery in the forecasting years.
This economic recovery was to be achieved by increasing spending in luxury goods, more holidays and households spending such as durable goods, business outlays and conditions in labor and financial markets. The only worry was in business contacts because of its sales and hiring even though there was still some growth in it. Apart from the above worry, growth was still considered to be restrained because of some factors such as low levels of households and economic recovery, concerns about the future tax and regulatory environment but at the end of the day, the committee agreed that despite the technological growth of economy like software, there were some improvement in it in a moderate pace.
The committee also had the observation that viability in the US labor market can be termed as disturbing due to unemployment rate which was high but was expected to decline gradually over the forecast period but also remained elevated and the measures of underlying inflation were low. It was evaluated that the more it took people out of employment, the more they lose the variable skills due to staying long without work which recovery is impossible until maybe after some years. To avoid being unemployed for long, people have been taking jobs that pay less or don't match with their skills as the one they have lost.
According to the incoming data, it showed that the employment rate was still increasing slowly even though its observation revealed some decline in it in the coming years (Saxton, 1997). Households spending were seen to be increasing gradually in order to boost the output growth but its setbacks have been contributed by unemployment and low housing wealth. Inflation has also remained subdued but according to further projections in the meeting, there will be an increase in future because of the increase in economic activities.
In financial market, inflation was seen to be moving up because of the rising prices for oil and other commodities and by farming of the economy. It was observed that there has been change in PCE price levels for almost 1 percent. Because of these, the Federal Reservation price stability was to take the responsibility of maintaining inflation rate of at least 2 percent and this was what was expected to remain by the end of the year.
Federal Reserve's current view about inflation. Inflation has generally been described as the persistent increase in prices of goods and services of a particular economy within a definite period. The Federal Reserve monitory policy decided to endorse the concept of price stability as its principal policy objective in order to lower inflation so that they can contribute to sustainability of current expansions.
To achieve the above price stability, some targets have to be put in place. Targets such as cementing the current gains will ensure that most of the beneficial effects of low inflation are maintained. Another target is to remove the incentives to backslide; this will reduce inflation and stimulation of economy by an increase for policy-makers.
However, a number of participants anticipated that the inflation will reach its long-run rate within the next year. The monetary policy tools the Federal Reserve uses to stabilize the economy and maintain price stability. Monetary policy has been considered to be the deliberate action by the Federal Reserve Board, to alter the amount of money supply in the US economy which has got an objective of influencing the cost and the availability of credit (Newyorkfed, 2008). So as to achieve this, there is need for policy tools that are available to provide further stimulus in order to attain stability in the economy.
Open market Operations: which its main principal is to influence amount of currency in circulation. It involves buying and selling of government financial securities and it is used on daily basis by the Federal Reserve. The discount rate: also known as window rate which is viewed as the interest which will be charged to depository institutions on loans which are received and commercial banks and other lending facilities. When discount rate is increased, it allows for lending hence money supply is reduced in the economy. Reserve requirement: The amount of funds which is held by depository institution to be against specified deposit liabilities. Interest on excess balance and required reserve balances: Here, the interests are being paid on the required balances by the Federal Reserve Banks in order to satisfy reserve requirement. By excess balance, it means the balance held in excess of the normal required balances and contractual clearing balances.
In the meeting, they agreed upon on evaluation of appropriate ways of the rates paid on balances on the light of the evolving market conditions and if necessary make some adjustments. Term asset-backed securities loan facility: It is meant to guide the market participants with an aim to meet households credit needs and support small businesses by issuing asset which are backed by securities. Term deposit loans: Deposits are removed from the account of these institutions so that they can compensate for the term deposit hence draining the reserve balances from the banking system. This term deposits are offered through the term deposit facility.
Expired policy tools: That comprises of the Money Market Investor Funding Facility which was out-dated on October 30, 2009. Others which were shown the door on February 1, 2010 were the commercial paper meant for funding facilities, commercial paper of asset backed for mutual fund liquidity, term securities lending facilities and primary dealer credit facility. The last facility to conduct its duty on March 8, 2010, was Term Auction Facility. All this policy tools were established to get cash directly to the borrowers and investors in the most important credit markets but they were shut down by the Federal Reserve after the financial crisis had improved.
Summary on the economic outlook for the next 12 - 18 months.
According to me, there is more to come in terms of economic recovery in the forecast months especially growth in GDP hence limiting the unemployment rate. This can be achieved through consumer spending, business investments and net exports (Kocherlakota, 2010). A part from the above, other contributing factors in the growth can be financial conditions such as the increase of equity prices, capital markets and reports of easing credit conditions in some markets. Inflation rate is also expected to go high in the next 12 to 18 months even though it will remain at the rates below those we see as consistent. In order to keep inflation rate on check, then there is need for monetary policies brought together with stable long-run inflation so that it cannot interfere that much with the economy of the country. Unemployment rate is one of the greatest concerns in labor markets since there is no vitality in the US even though the job opening rate is expected to rise in the next 12 to 18 months. This problem is brought about due to slow growth of the economy even though in the past years it has been observed to be improving.