The Federal Open Market Committee - Essay Example

3 March Introduction The Federal Open Market Committee (FOMC) regulates open market operations and currency issues. TheFOMC is consisted of seven governors; the FOMC secretary and the twelve Reserve Bank presidents, the directors of Monetary Affairs and International Finance Divisions, the Board’s director of Research and Statistics Division remain the main attending members in the FOMC meeting. The meeting commences with the minutes of previous meeting and summary of main points highlighted, voted and summarized. After this step, the first agenda of the meeting is the report on domestic open market operations, foreign currency and relevant monetary policy issues is submitted by the manager of system open market operations. Subsequently, the members are briefed about the monetary forecasts in which expected trend and their likely effects on the monetary system and objectives are highlighted and discussed as well. After that, the question and answer session takes place in which members are allowed to raise questions and Board staff’s national economic forecast are required to answer them. Then, the members discuss current monetary policy and the domestic policy directive in which different possible scenarios are outlined and critically assessed as well. Even in this part of the meeting, every member is authorized to ask questions about the possible negative effects on the other monetary issues. In this session, the possible scenarios and their likely effects on the open market operations provide clarity about the direction of the current monetary policy. Subsequently, the chair concludes the meeting and proposes particular wording for the monetary policy statement about lowering, increasing or keeping it unchanged the federal interest rate and subsequently voting takes place on the proposal. Critical evaluation of press releases In January 2014, The FOMC meeting decided to retain the federal funds rate from 0 to ¼ percent. In other words, the upper limit of the federal funds rate is ¼ and the lower limit is 0. However, this policy direction is associated with the objectives of monetary policy. For example, this range will be applicable when the unemployment and inflation remain within the targeted objectives in which the unemployment rate is required to remain between 6-1/2 and 2 percent inflation level. In this regard, it is important to mention that this meeting has also highlighted the fiscal policy and its implications for the monetary policy parameters. As far as the agenda of this meeting was concerned, it was only restricted to evaluate the performance of monetary policy and attainment of related objectives whereas the inclusion of fiscal policy matter in the monetary policy discussion clearly signifies that the FOMC meeting had deliberated on the irrelevant issue especially when considering the monetary policy. In the April 2014 press release, the interest rate has been retained the same, showing that the FOMC members are considering the efficacy of the existing monetary policy with regard to the interest rate and its close association with the unemployment rate and inflation rate. Even in this press release, the focus of the meeting was around these factors and their interaction with short and long term inflation objectives. Similar to the previous press release, the FOMC April press release has also indicated the negative effect of the fiscal policy on economic growth. At the same time, this press release also includes that the effect of the fiscal policy is decreasing as well. In this regard, it is important to mention that this claim which is also found in the January press release as well, the FOMC members have failed to provide further details about the type and depth of fiscal policy effect on the economic growth. This looks mere statement as nothing sustentative has been provided to prove the authenticity of this claim. In the June 2014 press release, the objectives of price stability and creation of maximum employment opportunities have been stressed as the FOMC attempts to ensure higher economic growth through stable labor market conditions. Additionally, reduction in asset purchase program has been pursued throughout this period by purchasing securities worth $15 billion per month instead of buying $20 billion purchase. This shows that the Committee has reduced $5 billion purchase of mortgage-backed securities, reflecting the confidence of the committee on the smooth functioning of the existing monetary policy. In July 2014 press release, it is clearly highlighted that the Committee has reduced mortgage-backed securities from $15 billion to $10 billion per month, demonstrating that the market is increasing its ability to continue performing without the injection of treasury securities. In September 2014 press release, the Committee has decided to reduce the purchase of agency mortgage-backed securities and this reduction will be applicable from October onwards in which $5 billion securities will be purchased every month, showing a decline of 100 percent from the earlier purchase where $10 billion securities were purchased per month. This is mainly because of the fact that the labor market conditions are improving in which interest rate has largely remained stable besides decreasing the unemployment rate is another encouraging sign of the monetary stability in the country. In the October 2014 press release, the Committee decides to reinvest principal payments from agency debt and agency mortgage-backed securities. However, it is pertinent to highlight that the committee has not mentioned any specific amount that it is going to reinvest. In other words, this looks ambiguous because in the previous press releases the Committee has been regularly updating the mortgage and debt amount relating to treasury securities. More importantly, in the December 2014 press release, the Committee has again not mentioned any mortgage or debt amount. However, it is relevant to mention that the press release provides information about the end of asset purchase program in October, showing that the program is no longer needed for maintaining consistency in the monetary policy for the next period as the all relevant economic indicators, such as inflation rate, unemployment rate, and long term inflation, economic activity and economic growth, are regularly improving and have shown that the existing monetary policy is obtaining its goals. Critical evaluation of meeting minutes Each meeting minutes detail different economic, monetary and financial matters. In the January 2014 meeting minutes, first annual organizational matters were discussed in which election of Committee members along with voting for the members took place. Subsequently, authorization for the domestic open market operations was carried out in which buying and selling of government securities in open market detailed various issues relating to involvement of various Federal Reserve Banks and their role in this policy. Additionally, in this part, details about different state level regulators and their involvement in the buying and selling of securities highlighted the role of these state level banks in the whole process of open market operations. It is followed by the minutes pertaining to authorization for foreign currency operations in which different arrangements with regard to foreign currencies elucidated different types of open market operations including dollar and foreign currency liquidity swap arrangements were not allowed to have pre-set limits (FOMC January 2014 Meeting Minutes). In the April meeting minutes, monetary policy normalization, developments in the financial markets and federal reserve’s balance sheet, staff review of the economic situation, staff review of the financial situation, participants’ views pertaining to current conditions and the economic outlook, staff economic outlook and committee policy actions have been provided and detailed as well. On the other hand, in the June 2014 meeting minutes, discussion pertaining to the recent developments in the financial markets along with the federal reserve’s balance sheet, has been included in which internal and external monetary policy issues and directives have been mentioned. In the developments in financial markets and the federal reserve’s balance sheet section, the deputy manager of the System Open Market Account (SOMA) detailed about the Term Deposit Facility and fixed rate overnight reverse repurchase agreement (ON RRP) by sharing exposition on the issue with the participants; in the monetary policy normalization part, the presenters provided information about extending monetary policy directives when the Federal Reserve avails large balance sheet. Certain issues were raised in the FOMC July 2014 meeting minutes. For example, in the monetary policy normalization part, it is mentioned that some participants expressed their disapproval pertaining to the normalization approach presented by the staff. However, the meeting minutes did not provide any of the reservations mentioned by the participants. In this regard, it is important to mention that the meeting minutes should have detailed the perspective of the disagreeing participants as this would have put a positive effect on overall outlook of the paper. Moreover, it can also be said that the meeting minutes only highlight descriptive and consensual economic policy issues. And the result of this approach is that it casts doubt over the policy application and understanding as the voice and perspective of dissidents have not been included in the meeting minutes. Furthermore, this type of policy has serious economic and financial ramifications. First, it is a normal trend that every meeting starts by highlighting the previous meeting minutes and the absence of any issue that has not received approval of all participants might not be helpful for understanding the whole economic outlook scenario. Along with the above mentioned issues, the September 2014 meeting minutes summarize the economic projections in which current economic indicators and the expected performance of the economic indicators have been detailed and evaluated as well in which projections till the end of 2017 have been highlighted. For example, it is expected that the unemployment rate is expected decline further and will remain from 4.9 to 5.3 till the end of 2017, highlighting stable economic outlook from the monetary policy perspective. Comparative analysis of Federal reverse’s monetary policy with other banks Federal Reserve, Bank of England, Reserve Bank of Australia and Bank of Canada share considerable monetary policy measures similarities during the period of 2014. The Federal Reserve and Bank of England attempted to achieve inflation objective- around 2 percent. A closer analysis of 2014 monetary performance in both economies clearly highlights that by and large the monetary policy was successful for attaining and controlling inflation within the pre-determined framework. At the same time, the Federal Reserve also endeavored to secure the objective of lower inflation and the same was also envisioned by the Bank of England. Moreover, the two economies have different interest rates during this period. For example, the Federal Reserve maintained the federal funds rate from 0 to ¼ whereas the Bank of England retained it below 0.5% level during the same period, reflecting that the monetary policy in both economies have different challenges and both endeavored to decrease the effect of those challenges through controlling the interest rate (Bank of England 1). Moreover, the monetary policy has substantially improved the employment availability in the United Kingdom. For example, the monetary policy report also signifies that the unemployment rate has reached 7%; besides, the Bank of England purchases assets amounting to £375 billion (Bank of England 1). The Reserve Bank of Australia’s monetary policy left different effect on different economic indicators in Australia. For example, the statement of 2014 monetary policy clearly states that unemployment rate has increased over the period of last six month (The Reserve Bank of Australia 2). This reflects that the monetary policy has remained under stress from different economic indicators during this period and it is the pressure of the economic indicators that have resulted in the form of increased unemployment rate during the reported period. In contrast, the US economy has been on the path to recovery during this period in which unemployment rate has been continuously diminishing throughout this period. The Canadian economy has also improved during 2014. In this period, the economy controlled inflation around 2 per cent and economic activity enhanced mainly supported by low interest rates and lower Canadian dollar; at the same time, the unemployment rate has reached below 7 per cent in 2014 (Bank of Canada 26). Broadly speaking, comparison between Canadian and US monetary policy exhibits that both economies have certain similar and contrasting policy differences. For example, as far as the inflation rate in both economies is concerned, it can be easily deduced that inflation rate has largely been similar and controlled; additionally, the unemployment rate in both economies has been diminishing, showing the stable and positive effect of the monetary policy on the economic activity which has enabled their economies to experience decrease in the unemployment rate. Conclusion The US 2014 monetary policy has largely been able to attain its monetary policy objectives during this period. First, the assets purchase policy was carried out throughout this period for supporting the open market operations in the economy. The purchase of assets was continued till the end of September and from October onwards, the FOMC decided to end this program, stipulating that the US economy has largely been recovered and the use of such injection was no more required. Additionally, the press releases of 2014 and the meeting minutes clearly signified that the members deliberated on all issues directly or indirectly related to the monetary policy; and this deliberation enabled the FOMC to trace the monetary policy performance for achieving its objectives; besides, it provided an opportunity to adjust with the changing economic and financial circumstances during this period. Also, the comparative analysis between the monetary policy measures of different banks exhibited considerable similar monetary policy steps and objectives as well. For example, the objective of unemployment reduction, controlled inflation rate in the monetary policy of Bank of England, Bank of Canada and the Reserve Bank of Australia clearly signifies that by and large these banks follow the monetary policy of the Federal Reserve. Works Cited FOMC January 2014 Meeting Minutes. “Minutes of the Federal Open Market Committee January 28-29, 2014.” 28-29 January 2014. Federal Reserve Bank. Web. 3 March 2015. The Reserve Bank of Australia. “Statement on Monetary Policy.” November 2014. Web. 3 March. 2015. Bank of England. “Monetary policy as the economy recovers.” February 2014. Web. 3 March 2015. Bank of Canada. “Monetary Policy Report.” October 2014. Web. 3 March. Read More