Federal open market committee - Essay Example

? Federal Open Market Committee of the of the Federal Open Market Committee Introduction 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 up since the recession. Lastly, the S&P 500 Stock Index is around the 1300 mark these days- its last recorded highest point was at around 1500 in late 2010 signaling the end of the depression. The stock market therefore seems to be relatively stable (www.federalreserveeducation.org). Expectations of Economic, Financial and International Conditions for the Near Future It clearly seems that the US economy has much room for improvement. We are at a stage where we are just recovering from a financial crisis in which millions of people lost their jobs, their homes and had to liquidate their savings and investments to survive. Consequently there is an atmosphere of disbelief and resentment towards the Government and the banking system. However looking at the figures above, most of the economic indicators show that we are on a slow path to recovery. It clearly takes time for people to forget their past hurts. But with most of the figures stable and on the rise, there is no need to panic again. The only thing we need to overcome is fear itself. Although inflation and US debt are key worries, it cannot be helped if we are to overcome the last downturn. At the same time, there is a clear need to get our act together and continue to be a leader of the free world as its only superpower-our international dominance is affected if we are unable to promote jobs and economic stability at home. Identification of Economic Issues of Special Concern at the Present Time or in the Near Future One of the issues of most concern is the rate of unemployment. The Government has already worked to stabilize the key sectors of the economy like the automobile manufacturing and banking sector that so prominently figured in the newspapers during the crisis. Once the consumer and business confidence returns, the spending will resume and the economy will be back to its former levels. Inclement weather in some states has exacerbated the financial crisis for them. The ineptitude of Government, spending on the War on Terror and other unnecessary expenses need to be curtailed. We should look to our politicians to make spending cuts at home. The cost of healthcare, unemployment insurance and mounting US debt is taking a toll on us all, whether we like it or not- and there seems to be no alternative in sight but to overcome our fears about insecurities and work to revive the economy to pre-depression levels (www.newsahead.com). Recommendation In the light of all the above, I would recommend that we keep the short term interest rate at its present level. There is no point in lowering it further since fear and insecurity loom large in people’s minds and until we get rid of these specters, the Government would be hard pressed to revive the economy. There is also a need to enact laws and ensure proper corporate governance so that the sub-prime mortgage fiasco is not repeated in the near future. References Samuelson, P. & Nordhaus, W. (2004). Economics, 18th ed. McGraw Hill/ Irwin. The Federal Reserve Website at http://www.federalreserveeducation.org/resources. Washington DC 02 Aug 2011 Deadline for US debt default. 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