The FOMC Meeting - Essay Example

FOMC Meetings Introduction The FOMC meeting takes place in Washington DC. The Members supposed to be in attendance are, the seven governors, the twelve Reserve Bank Presidents, Secretary of the FOMC, Boards Director of the Research and Statistics Division and the Deputy, Monetary Affairs and International Finance Divisions directors. The meeting starts with the approval of the previous meeting minutes. After approval, the chair directs participants to the agenda of the day where agenda number one is a report by the manager of System Open Market Operations. The report is usually in foreign currency and Domestic Open Market Operations. After discussion and questions from the Bank presidents, the report is then ratified. The next stage is board’s staff representation where the board’s director gives a forecast; it is discussed and the bank presidents raise questions where necessary. Bank presidents then provide an overview of the economic conditions in their areas followed by the governors giving their national outlook. Agenda number two is about the monetary policy and domestic policy directives. Board Director of Monetary Affairs Division outlines different scenarios of the monetary policy, participants’ discuss them and then the chairperson summarizes and proposes any wordings to be made in the policy statements. Next, the participants have their lunch as they present the latest developments in Congress on the banking legislations of importance to the Federal Reserve. At exactly 2.15 p.m., an announcement is made regarding any change in the discount and federal funds rates. The announcement is made as a promotion to openness in banking. When FOMC meeting ends, the Chair of Federal Reserve gives a press statement to give out the decisions made. Summary of Press statements The following information gives a brief of the press statements released for the eight meetings held in 2014. Release Date: January 29, 2014 The January press statement shows some improvement in economic activities as well as improved labor markets. Unemployment rates have reduced, and there is an increasing household spending trend. Business investments have also improved which is believed to have stimulated the improved economic activities. The existing fiscal policy is seen to be pulling down economic activities, but it is losing its strength with time. With reduced unemployment rates, the committee sees a risk of inflation though it will be maintained at the committee’s objective of 2%. In the statement, the committee confirms that the target rate for the funds will remain to be 0 to 1/4 percent if the unemployment rate will stay 6-1/2 percent. However, the inflation rate is expected to be above the committee’s objective rate of 2%. With that expectation, the committee confirms to review the Federal fund rate according to information received from inflation growth. If it grows, then the federal fund rates will also increase. The Committee mentions how it will be receiving information concerning economic and financial developments in the new future. To improve labor market to the right level, the committee decides to employ all the necessary tools fully. Release Date: March 19, 2014 Information is received from the last meeting of Federal Open Market Committee in January showing that during the winter season, economic activity growth went down. The reduction in the pace of growth is related to the unfriendly weather conditions in those months. Information for labor market shows further improvement compared to the last details received by the committee. Household spending and business investing continue to advance as well as employment rates. The inflation rate is running below the committees long-term objective. The committee sees that the inflation rate been below 2% can be a risk to economic performance hence need of moving towards the committees objective. The committee decides to take a further reduction in asset purchasing hence adding holdings of agency mortgage-backed securities at 25% instead of the previous 30%. The existing policy of reinvesting principal payments is maintained by the committee to support economic development. The short-term fund rates rare also maintained as the committee seeks more information on both realized and expected market targets. Release Date: April 30, 2014 Information received for the past months shows that economy activity growth has picked up hence recovering from the winter season that hit the economic developments. Labor market conditions showed an improvement, as household spending levels seem to be increasing. Fiscal policy, as seen in the earlier meetings, was still a restraining factor towards the development. Hence, need the best tools in development fostering. Inflation was seen to be running below the committee’s target, although the long-term inflation was stable. With the appropriate policies, economic activity, and labor market conditions were seen to keep on growing. When inflation rate fails to move towards the committee’s objective, it was considered a risk to economic performance. The short-term rates of interest were to remain at the committee’s objective although subject to maximum employment objective and 2 percent inflation rate. The committee was to do its assessment every time to identify any change in the following months. Release Date: June 18, 2014 Information showed a rebounded growth of the economic activities. Labor market indicators also showed more improvement in market conditions with elevated unemployment rates. The household spending seemed increasing, and business investments were high and housing sector was growing at a slow pace. In the statement, Fiscal policy was the primary restrain to economic development but the restraint was reducing. Inflation was still running against the committee’s objective, but long-term inflations expectations remained constant. The committee said that there was more underlying strength in promoting economic development and unemployment reduction, and so it will reduce buying assets further. The inflation rate running below 2% was recognized, as a threat to developments hence needs it to move towards the committee’s objective. To support economic development, the committee decided to increase the longer-term securities that were seen as a move to reduce long-term interest rates and help improve financial conditions. The Committee commits itself in monitoring the market trend in the coming months to employ its tools appropriately. Short-term interest rate is maintained the same for the federal funds, but the committees have to take into considerations of the inflation pressure, financial conditions and inflation expectations. Release Date: July 30, 2014 Information received from the time Federal Open Market Committee met in June showed that economic activity growth rate rose in the second quarter. The market conditions seemed to have improved while unemployment rate on the other hand was declining. The labor market indicators showed some underutilization of the available labor resources in the market. Household spending and business investments were advancing further as the housing sector remained growing slowly. The committee saw some balance in development with the inflation rate been below the committee’s objective reducing. Due to sufficient underlying strength in support of economy improvement, the Committee committed itself to making further reduction in its pace of assets purchase. That was to start by adding to its holdings of agency mortgage-backed securities at a pace of $10 billion per month instead of previous $15 billion per month. With a commitment to keep on analyzing the market forces, the committee retained the short-term interest rates at 2%. Release Date: September 17, 2014 Information showed economic activity was increasing at a moderate pace. The labor market conditions had improved further although the market indicators showed some underutilization of labor resources. Household spending appeared to rise at a moderate pace when the business investments were advancing. The fiscal policy remained the restraining factor to economic growth, although the level of restraint was seen diminishing. Inflation was below the committee’s objective, but the long-term expectations remained stable. Since year start, the 2% inflation risk to economic advancement was seen to be diminishing with time. The Committee decided to maintain the usual policy of reinvesting principal payments from its holdings of agency debt. In the maintenance of the usual 0 to 1/4, percent target range; the committee was to access and analyzes all relevant information relating to maximum employment and the 2 percent inflation. Release Date: October 29, 2014 The information received showed that economic activity was expanding at a moderate pace. Labor market conditions were seen to have improved further. Unemployment rate was diminishing over the time when meetings were not on while labor market condition indicators showed underutilization of the labor resources. The general labor market was observed to have improved regardless of the labor underutilization. On financial market developments, the manager reported potential arrangements that would allow depository institutions pledge funds at the Federal Reserve as collateral when borrowing. The received information showed that economic activity was expanding at a moderate rate. The labor market condition had improved while price inflation was still below the FOMCs longer-run objective of 2 percent. Housing market had also increased, and the business investments were growing over the time when meetings were off. Release Date: December 17, 2014 The press statement showed that economic activity was expanding with labor market conditions improving. The household spending increased, and business investments were increasing in volume. The price inflation rate was expected to rise to the committee’s objective, 2 percent since the market labor conditions had improved. In support of further improvement in employment and price stability, the federal fund rate was to remain as usual and in case of moving to the price inflation rate the rate would be revised. Other policies in the statement were reinvesting principal payments from the mortgage securities by the committee. The same policy was also to be maintained in operation in the following months. FOMC Meeting Minutes The second part of the assignments summarizes the minutes of 2014 FOMC meetings. January 28-29, 2014 FOMC minutes show other economic and policy issues rose in the meetings. These may include, The Federal Open Market Committee authorizing and directing the Federal Reserve Bank of New York, to carry out the most recent domestic policy directive adopted at a meeting of the Committee where necessary. One of the ways the Federal Bank does that is through lending on an overnight basis. The other point of concern in the minutes was purchasing and selling foreign currencies through cable transfers in the domestic market or foreign market. The minutes show how the Federal Open Market Committee searches for monetary conditions that will improve employment as well as maintain price stability. The Committee requests the desk to keep the policy of reinvesting principal payments on agency mortgage securities. March 19, 2014 The minutes show that the committee maintained their discussions on the three main topics, development of the financial markets, staff review, and economic situation, and lastly staff review and financial conditions. Upon giving a report on the System Open Market, the committee ratified their transactions, and there were no currency interventions for the past months. As per the report given on slowed economic growth, it was realized that economic activities were down with the due to unfavorable weather conditions. The inflation rate also continued to run small as compared to the committee’s target. The rate of job openings reduced while the hiring rate remained the same compared to December and January rates. Manufacturing industries recorded the biggest gap in production activities since the employees were not able to produce in the severe winter season. Consumption expenditure for a real person on the other hand increased in the two months December and January. Release Date: April 30, 2014 In a meeting, Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, deliberated on the matters affecting normalization of the monetary policy. The discussion was just a part of planning hence no final structures and tools were set to the same. In the meeting, the stakeholders discussed on increasing the short-term interest rates if there is a need and how to control them if they happen to be high. With the idea, the committee discussed various topics related to policy normalization. The discussion was then made to be an informative one rather an instrument for implementing the policy. The committee discussed how the different available tools could affect the interest rates when the policy is made into force. The policy was to help when the Federal Bank balance sheet grows huge such that it can cause high-interest rates. No interventions recognized for the system open market account and the committee ratified the open market desks domestic transactions. In financial market developments, the committee agreed to renew currency arrangements with Bank of Canada and Bank of Mexico. The committee also decided to renew dollar and foreign currency liquidity arrangements with Bank of England and the Swiss National Bank. Information indicated that economic growth paused for a while in the first quarter, but the activity picked later. Employment rates stayed at 6.7% in March though the labor force increased. Release Date: June 18, 2014 On the development of financial markets, the SOMA Manager presented his report, and the committee ratified it since there were no interventions in its operations. The committee extended their discussion on the monetary policy normalization that shows the most appropriate strategies to use in case the balance sheet is huge. The committee agreed that, rate adjustments on excess reserves should be used in the normalization policy. In the economic situation, the information received showed that the real gross domestic product had fell although the economic growth was recovering well from the recent bad months. The employment rate improved as unemployment declined in April. Expectations of long-term inflation rates remained the same. Labor market conditions improved within the months though the labor force participation rate declined in April. The financial conditions remained in line with the economic activity and employment trend. The expected Federal Fund rates were lower in the end while equity prices rose Release Date: July 30, 2014 On financial markets development, there were no observed financial interventions in System Open Market Operations and so the committee ratified the report by the manager. The committee insisted on more information on the monetary policy normalization and the staff who came up with the idea detailed the approach. Participants showed their interest in supporting the normalization policy after agreeing that it is important to have the Federal rate as the key policy rate. Received information showed that the gross domestic product rebounded in the second quarter after its decline in the first quarter. Labor market conditions were observed to have improved over previous months. Production increased and capacity utilization moved higher in the second quarter. PCE moved quicker than the previous period while residential investment turned up after a cline in the second quarter. Long-term Treasury securities yields fell; dollar reduced its value and equity share increased. Release Date: September 17, 2014 Based on the financial markets, the SOMA deputy manager gave a proposal of changes on ON RRP exercise that could see it be used as a supplement tool for policy normalization. However, there were no intervention operations in foreign currencies for the Systems account over previous months hence ratification. In the monetary policy normalization, the present participants considered publication of the statements and principles of the policy normalization as discussed. Personal spending and business investments seemed to have increased over the following months. Release Date: October 29, 2014 Global concerns affected the foreign financial markets with the dollar value changing due to decreased global economic activity. The outbreak or Ebola was another worry for the financial markets since business dropped in fear of the disease. The Treasury market became volatile on October 15, showing a decline in Treasury yields. The previous months saw a decline in mortgage rates available for borrowers. The credit markets became more accommodative to consumers in the third quarter. Just like the United States, other foreign financial markets grew the concern in the global economy growth and its performance factors. Release Date: December 17, 2014 The most concern in these minutes was developments in the financial markets and Federal Reserve Balance Sheet. It was noted that the domestic and foreign financial markets were improving. That was a recovery from the previous months when it was hit by the global economy challenges. FOMC authorized the Federal Bank of New York to conduct a series of overnight reverse repurchase operations but with involvement of the United States government. The economic activities were increasing faster than in the third quarter. Personal consumer expenditure increased hence increasing the household spending. U.S Federal Reserve and other central Banks National Bank of Belgium serves the same purpose like U.S Federal Reserve. In 2014, the two central banks introduced normalization of monetary policy. The move process meant expanding the normal monetary policy but in normalization, interest rates are used as the banks instrument instead of the Balance Sheets. The Central Bank of India is using a common monetary policy to U.S Federal Reserve. In 2014, the two central banks put into use the fiscal policy where in India the Central Bank was after increasing reserve money. Danmarks National Bank in Demark also uses these monetary policies in regulation of the amount in circulation. In 20143, U.S Federal Reserve experienced the same practice. Conclusion FOMC meetings are important because, through them, the finance presidents come together to review the monetary policies in operation and change when necessary. The meetings are held eight times in a year. Federal Reserve rates and discount rates are discussed in the meetings. The meetings have press statements and minutes of the meetings on their website hence providing valuable information as discussed above. The U.S Federal Reserve plays a critical role in financial issues of a country. The central banks in each country are concerned with the monetary policies and other financial instruments, which help in the development of a country’s economy. They regulate the amount in circulation by adjusting the lending rates. During inflation times, they increase the rates to reduce the amount in circulation. Rates can also be lowered in case the government is promoting investments. References Federalreserve.gov,. N.p., 2015. Web. 1 Mar. 2015. Read More