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Federal open market committee - Essay Example

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The Federal Open Market Committee plays a key role in setting the rates of interest on loans etc.that are available with banks and other lending institutions.In fact if we consider carefully,monetary and fiscal policy are the two ways in which the money supply and interest rates within an economy are controlled. …
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Download file to see previous pages The Federal Open Market Committee plays a key role in setting the rates of interest on loans etc. that are available with banks and other lending institutions. In fact if we consider carefully, monetary and fiscal policy are the two ways in which the money supply and interest rates within an economy are controlled. This has impact on the rates of inflation, employment, job creation, productivity and a whole lot of other factors that form part of our financial and economic well being and affect the National Statistics and state of the economy. In this assignment we are going to take on the role of the Federal Open Market Committee and make a decision on short term interest rates for the USA. Discussion The term ‘Open Market Operations’ refers to the actions of the FOMC in directly controlling the money supply available with banks and indirectly by affecting the rates of interest and lending available with banks (Samuelson & Nordhaus, 2004). If the FOMC has decided to tighten monetary supply and credit expansion, it will sell securities in the open market at a higher rate, which have to be picked up by the banks. Using part of their money supply to achieve this objective, it leaves the banks with reduced capacity to give out loans. As the amount of lending has a connection with available reserves, a reduction in lending reserves would automatically put a dent in credit expansion and lending would dry up. So here the FOMC has managed to reduce credit expansion. On the other hand, if it was desired to increase the credit supply in the economy, the FOMC would work to buy securities from the open market and in doing so, give the banks funds which they could use for lending purposes. This would make lending easier and the economy would receive a boost by way of increased trade and investment opportunities. It is notable that Open Market Operations is only one tool at the disposal of the FOMC to control the money and credit available in an economy. Being a Banker to the Government, printer of US currency notes, Bankers Bank, increasing and decreasing the Reserve Ratio, and even applying moral persuasion are some of the ways in which the Federal Reserve seeks to exert a good measure of control on prices, productivity, inflation and employment in the USA (Samuelson & Nordhaus, 2004). Analysis of Current Economic Conditions Let us now move on to the actual statistics at the present time. The CPI as of May 2011 stands at 224.804. Prices have been rising slightly in recent years, as costs to produce goods and services have gone up. The GDP was 15018.1 for Q1 of 2011 and GNP was 15255.1 for the same period. This also registered a slight increase, which may be a combination of price and productivity factors. Total nonfarm private payroll employment stood at 108677 as of June 2011. The Industrial Production Index stood at 92.9815 as of May 2011. All of these figures show a slight increase, indicating that the economy is on the rebound. The Industrial Production of Durable Goods was recorded at 88.3948 as of May 2011 and Industrial Production of Final Goods (Market Group) was recorded at 94.6823 for the same period. Increase trends here mean that the economy is still recovering from the depression. The figure for Housing Starts of new privately owned housing units was 560 in May 2011 picking up slightly from 541 units the month before. Number of units authorized but not started hovers around 81. The housing market has been most affected by the depression and will take some time to pick up- at the moment we are seeing lackluster demand despite low interest rates. A lot of homeowners were burned in the last financial crisis. Real retail sales for consumer and food items stood at 172202 in May 2011 registering a drop from 172902 a month before. This means that consumer confidence is still lacking and people are still apprehensive about their next paycheck- consequently consumer spending has hardly picked ...Download file to see next pagesRead More
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