Economics; Policy Recommendation-FOMC - Term Paper Example

Economics; Policy recommendation-FOMC The Federal Open Market Committee (FOMC) devises the monetary policy of the economy. There are seven members from the Board of Governors (BOG), the president of the New York Federal Reserve Bank and presidents of the supplementary Reserve Banks who are the voting members of the FOMC. However, the presidents of all the Reserve Bank participate in the policy discussion of FOMC regardless their voting power. Generally the FOMC meetings are held eight times in Washington, D.C fro the discussion over the monetary policies and economy of the U.S. The monetary policy is the policy measurements of the committee which is commenced by the Federal Reserve for controlling the credit and availability of money in the economic system for assisting and supporting the goals of the economy. The 1913 Federal Reserve Act has given the Fed the liability for setting monetary policy for the country. There are three measurement tools of the Fed through which it manages the monetary policy. These are- (i) open market operations, (ii) the discount rate and (iii) reserve requirements. The FOMC is accountable only for open market operations. On the other hand, the Board of Governors of the Federal Reserve System controls discount rate and reserve requirements operations. Manipulating these three policy tools, the Federal Reserve influences and controls the demand for money and supply of money in the economy. In this way the Fed maintain the balances at Federal Reserve Banks, which the depository institutions hold. In this way the Fed adjusts and modifies the federal funds rate, which is nothing but the interest rate time to time, and when required. (FOMC). Any changes in the rate of interest or the federal funds rate by the Fed in turn results in a lots of movements in the economic parameters, such as the liquidity amount of money and availability of credit in the economy, changes in other short-term interest rates, long-term interest rates, foreign exchange rates etc. Eventually theses changes result in affecting the change of the economic variables regarding output, growth, employment, prices of goods and services, etc. From the December 2009 meeting of the Federal Open Market Committee there emerged some suggestion regarding the future policies. It was argued in the policy prospect that there will be taken supportive economic activity for strengthen the economy. The committee has anticipated a high reduction in weakening of the labor market. Though household spending is growing and getting higher at a reasonable rate but it is expected to continue guarded by the dwindling of the labor market, humble growth of income, poorer housing assets and a policy of tight credit. Business expenditure seems to increase on the ground of software, tools and equipments. However, structural investment is toning at a best. Employers appear to stay unwilling to add to payrolls. Stocks of inventory by the firms have been considered in a better arrangement with sales. When lending by the commercial banks persists to contract, condition of the financial market still stay helpful, sympathetic and encouraging to the economic growth. As the crisis has not been completely evaporated, the velocity of the economic improvement is expected to be reasonable for the present time. In the context of stabilization of prices, the Committee is hopeful of a slow but stable return of the utilization of the resources to the higher levels. It has been expected by the committee that the inflationary pressure is likely to be quiet, at least for the time being with the stability of the long run inflation expectation and with the continuation of the significant resource sagging to control cost pressures. It has been decided in the meeting that the committee that will keep the mark at the range of 0 to ¼ percent of the federal funds rate and will persist to expect that situation of the economy along with the stumpy rates of the utilization of resources, a passive trend of the inflation rate and a constant expectations of inflation, are possibly to justify the extremely low levels of the rate of federal funds for an extensive time period. The Federal Reserve is likely to purchase a high amount of mortgage-backed securities along with agency debt for giving sustainability to the housing markets and mortgage lending as an expansionary policy. For promoting a flat market transition, the Committee is steadily slowing the speed of such purchases. Besides, the committee expects that these dealings will be executed in a rapid pace. In view of the growing attitude of the economy and conditions of the financial markets, the Committee is likely to carry on and evaluate its security purchase. (Board of Governors of the Federal Reserve Systems) The Federal Reserve believes lucidity about the goals of the monetary policy, manner in which it is conducted and the positions of the monetary policy are the fundamentals in achieving its effectiveness. According to the Federal Reserve Act the goals of monetary policy are “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates" (Monetary Policy and the Economy, 15) for overall development of the community and economy. For achieving these objectives financial stability is utmost important. On the morality of providing a stable financial system to the civilians, The Federal Reserve reacted uncompromisingly to the recent financial crisis. As a rapid step of the monetary policy the Fed reduced the interest rate from to a mere ¼ percent and effectively to zero for giving a huge boost to the economy. (Kohn) Besides, for supporting and adjusting liquidity requirement and nurturing better conditions in the financial markets the Fed executed many supportive programs, which guided to some major changes in its balance sheet. Some of these are- the Commercial Paper Funding Facility (CPFF), the Asset-Backed Commercial Paper Money Market, Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), the Term Securities Lending Facility (TSLF), the Primary Dealer Credit Facility (PDCF) and the temporary liquidity swap arrangements between the other central banks and the Federal Reserve. These tools are mainly were taken mainly for three types functions. First set of tools can assist 14 foreign central banks in the provision of their dollar liquidity with which the Fed accepted two-pronged accord concerning currency swaps. Term Auction Facility, PDCF, and TSLF are such tools. The second set of tools occupies the condition of liquidity in the main credit markets directly to borrowers and investors. The CPFF, AMLF, MMIFF, and the Term Asset-Backed Securities Loan Facility (TSLF) are such tools. Third set of tools aims to carry the working of credit markets in the course of long-term securities for the portfolio of the Federal Reserve. However, in August 2009, as a method of promoting a horizontal changeover in the markets the FOMC announced a progressive slow down in the rapidity of its Treasury securities purchases. The FOMC announced a parallel statement about the purchase of agency and agency mortgage-backed securities in September 2009. However, in October 2009, the purchases of full amount of Treasury were completed. In November 2009, as a reflection of the partial availability of agency debt, the Federal Reserve declared the amount of total purchases for agency debt, which would be a bit, less than the amount of previous announcement. All these tools played some major roles in improving the economies financial market. However, with the improvement of the financial market performance, the Federal Reserve has cut down some of the tools. (Board of Governors of the Federal Reserve System) For supporting the development of the economy the Federal Reserve formed many special lending amenities. The Federal Reserve has also supported economic recovery through spiky reductions of the federal funds rate and through security purchases. The Federal Reserve has been mounting many apparatus for reinforcing its power of short-term interest rates as a policy of reduction of the huge amount of reserves seized by the banking system. The Federal Reserve has developed other fresh apparatus for consuming huge quantities of reserves, together with reverse repurchase agreements and term deposits. Both theses tools of reverse repurchase agreements and the term deposit facilitate the Fed to consume significant amounts of reserves from the banking system. The Fed for reducing the reserve balance is permitting mortgage-backed securities (MBS) to overflow with its maturity. However, with FOMC determine that the financial tightening is reasonable then it may also decide to sell securities in future with the sufficient recovery of the economy. These kinds of sales of securities would involve suitable contemplation of economic environment. Let us now check the effect of 2009 FOMC policy recommendation regarding the housing sector. It was seen that the activities regarding the real estate and housing constantly was passive. Construction of the Single-family housing started its momentum and accustomed to a level just slightly above the starting level. Development of the multifamily housing started with a skip in from its very low. However, overall demand of housing remained very weak. It was seen that the inventories constantly rise relative to the dawdling rate of sales, even though the supply of unsold new single-family homes knocked down to its lowest level from the last five years. A decrease in the sales of the present single-family homes also has been noticed. It has been seen that the rate of sales of the existing home decreased to a much lower level in comparison with the sales of the new homes over the last one year. Though the borrowers have been provided the opportunity of repaying the loans with a decreased in the mortgage rate by the FOMC, the limitation in home sales continued. A fall in the prices of house has been noticed with a subsequent fall in demand. With the recent FOMC policy recommendation it has been seen that though the development of housing in Northeast and South declined but it progressed in case of the West and Midwest. Development of the single-family homes is steady and an upturn has been noticed from a very low level. Therefore the main question is whether the development and construction of new homes will point a strong recover in the near future.  The stock of unsold new homes and a flexible labor market environment recommend a low possibility in the growth of home construction will be seen at least for the coming few the months. (Board of Governors of the Federal Reserve Systems) With the recent policy recommendation of the FOMC one can argue that the policy was more positive and optimistic about the labor market situation. This is reflected in the Fed’s statement as a "stabilizing" labor market in comparison with its January policy explanation where it described, “deterioration in the labor market is abating" (FOMC Policy Statement – Fed is Optimistic about Labor Market Compared with View in January).  The FOMC’s January policy meeting after the publication of its January and February employment reports permits this adjustment. A drop in the rate of unemployment has been noticed in January and February. The speed of job losses has decreased significantly on an average.  So this report signifies a positive and better environment is gradually taking place in the economy. However, the collection of unemployment insurance by a high number of people for the last three months are annoying and irritating features of the labor market that rationalize that the FOMC has to modify its policy further to provide a secure environments to the people. (FOMC Policy Statement – Fed is Optimistic about Labor Market Compared with View in January; Cheney and Gonzalez). References 1. Board of Governors of the Federal Reserve Systems. Press Release, January 27, 2010. Available at: http://www.federalreserve.gov/newsevents/press/monetary/20100127a.htm (accessed on March 30, 2010) 2. Board of Governors of the Federal Reserve Systems . Press Release, December 2008. available at: http://www.federalreserve.gov/monetarypolicy/20081202b.htm (accessed on March 30, 2010) 3. “Board of Governors of the Federal Reserve Systems”, Federal Reserve, March 17-18, 2009, Available at: http://www.federalreserve.gov/monetarypolicy/fomcminutes20090318.htm (accessed on March 30, 2010) 4. Cheney, Bill and Gonzalez, Oscar, “FOMC December 16th Policy Statement: Read all about it!” FMC Global Investment Management, December 21, 2009, Available at: http://www.mfcglobal.com/pdf/economic_update_122109.pdf (accessed on March 30, 2010) 5. “FOMC Policy Statement – Fed is Optimistic about Labor Market Compared with View in January” Northern Trust, Fxstreet.com, March 16, 2010. Available at: http://www.fxstreet.com/fundamental/analysis-reports/daily-global-commentary/2010-03-16.html%5C (accessed on March 30, 2010) 6. “FOMC” , Kookyplan. 2009. Available at: http://kookyplan.pbworks.com/FOMC (accessed on March 30, 2010) 7. Kohn, Donald. L. Policies to Bring Us Out of the Financial Crisis and Recession, board of Governors of the Federal System, 2009, available at: http://www.federalreserve.gov/newsevents/speech/kohn20090403a.htm (accessed on March 30, 2010) 8. Monetary Policy and the Economy, Federal Reserve, available at: http://www.federalreserve.gov/pf/pdf/pf_2.pdf (accessed on March 30, 2010) Read More