Question

1. ​(Please refer to the attached exhibits and sample article​ ). Which paragraph would be best for a target audience of people familiar with economics in general and the workings of the Fed in​ particular? (choose 1 exhibit?)

2. (Please refer to the attached exhibits and sample article​ ). Which paragraph would be best for a target audience of people unfamiliar with​ economics? (choose 1 exhibit?)

3. ​(Please refer to the attached exhibits and sample article​ ). Which exhibits are the most ​accurate?

4. If the FOMC orders the open market desk to purchase government​ securities,

A.  the money supply will increase and the the interest rate will increase.

B. the money supply will increase​, and the interest rate will decrease

C. the money supply will decrease and interest rate will increase

D. the money supply will decrease, and the interest rate will decrease

Article:

Jobs and the Fed

Whatever happened to the central bank's Evans Rule?

Updated March 9, 2014 7:34 p.m. ET

The Labor Department's January jobs report on Friday had something for optimists and pessimists: The economy created only 113,000 net new jobs in the month, a second straight month of weak job growth. But the jobless rate fell to 6.6%, the labor force expanded by some 499,000 jobs, and the labor-force participation rate rose from its lowest level since 1978. So continues the slow-growth pattern of this expansion.

More interesting is that at 6.6% the jobless rate is now a mere tic away from meeting the Federal Reserve's Evans Rule target of 6.5%. That's the standard , named for Chicago Fed President Charles Evans, that the central bank said in December 2012 would be its guide for when it would consider raising interest rates. Even with mediocre job growth, the Evans Rule jobless rate target will be reached in the next few months and maybe as early as next month.

So will the Fed now look to raise the fed-funds rate from near-zero, where it has been for an extraordinary 62 months? Don't count on it. The Fed is still tapering its bond purchases at a rate of $10 billion a month, with several more months to go, and to minimize any market ructions former Fed Chairman Ben Bernanke was at pains to say rates would stay low as far as investors could see.

Perhaps soon the Fed will revise its Evans Rule downward to a jobless rate of 6%, or even 5.5%. But then that wouldn't say much for the credibility of Fed rules. The central bank unveiled the Evans Rule to substantial fanfare in 2012 as part of its campaign to be more transparent about policy and offer forward guidance to markets. Yet what we've learned about the Fed's guidance is that it doesn't mean very much. Perhaps the Open Market Committee should have called it the Evans Suggestion.

The Fed is still making up monetary policy on the fly, trying to see how low it can get unemployment before it has to test its political nerve and raise rams . The mistake was telling markets there was a fixed rule when the only sure thing at the Fed is more improvisation.

EXHEBITS:

Exhibit 1

The Wall Street Journal article “Jobs and the Fed” is a criticism of the supposed efforts of the Fed to be more transparent. In 2012, the Fed announced, to much fanfare, that it was going to follow the “Evans Rule”; specifically, when the unemployment rate dropped to 6.5% it would begin tightening (or at least lower the degree of easing) of open market operations in an effort to guard against a rapid increase in inflation. However, the recent spate of positive economic news and the drop of the jobless rate to 6.6% doesn’t seem to be affecting monetary policy at all. Granted, the target of 6.5% unemployment has not yet been met, but it seems only a matter of time before that point is reached and Ben Bernanke has already taken great pains to announce that the Fed Funds rate is going to remain near zero for the foreseeable future. So, in Poole’s view at least, it seems that the Fed has lost all credibility and is going to continue to keep the public in the dark about the guidelines it follows in conducting monetary policy.

Exhibit 2

The Wall Street Journal article “Jobs and the Fed” is a criticism of the Federal Reserve (which implements the nation’s monetary policy). The point it makes is that the Fed, as it’s known, has in the past promised to follow certain rules in deciding what kind of policies to pursue but that it is now going back on its word. Specifically, in 2012, the Fed announced that it was going to be more transparent in its actions and was going to follow the so-called “Evans Rule” (named after the President of the Chicago Fed). That rule dictated that when the nation’s unemployment rate fell to 6.5% the Fed would pay more attention to preventing potential inflation, rather than continuing to try to reduce the unemployment rate. However, the author points out, even though the unemployment rate is expected to fall to that target level in the near future, the Fed shows no signs of changing its policy, which up to now has been targeted at increasing economic growth and reducing unemployment. Many economists believe that it is important that the Fed make clear to the public how it decides on monetary policy and to stick to its promises and are now upset that it appears the promises made in 2012 won’t be kept.

Exhibit 3

The Wall Street Journal article “Jobs and the Fed” is a criticism of the supposed efforts of the Fed to be more transparent. In 2012, the Fed announced, to much fanfare, that it was going to follow the “Evans Rule”; specifically, when inflation rose to 2%, the upper limit of the Fed’s target range, it would begin tightening (or at least lower the degree of easing) of open market operations in an effort to guard against a further, rapid increase in inflation. However, the recent spate of positive economic news and the drop of the unemployment rate to 6.6% doesn’t seem to be affecting monetary policy at all.

Granted, the target of 2% inflation has not yet been met, but it seems only a matter of time before that point is reached. Ben Bernanke has already taken great pains to announce that the Fed Funds rate is going to remain near zero for the foreseeable future and that inflation is not the Fed’s primary concern. So it seems that the Fed has lost all credibility and is going to continue to keep the public in the dark about the guidelines it follows in conducting monetary policy.

Exhibit 4

The Wall Street Journal article “Jobs and the Fed” is a criticism of the Federal Reserve (which implements the nation’s monetary policy). The point it makes is that the Fed, as it’s known, has in the past promised to follow certain rules in deciding what kind of policies to pursue but that it is now going back on its word. Specifically, in 2012, the Fed announced that it was going to be more transparent in its actions and was going to follow the so-called “Evans Rule” (named after the President of the Chicago Fed). That rule dictated that whenever inflation rose above 2% the Fed would pay more attention to preventing prices from increasing, rather than continuing to try to reduce the unemployment rate.

However, the author points out, even though the unemployment rate is expected to fall and inflation expected to increase to above 2% in the near future, the Fed shows no signs of changing its policy, which up to now has been targeted at increasing economic growth and reducing unemployment. Many economists believe that it is important that the Fed be aware of the dangers of inflation and always err on the side of keeping that under control, even if it is at the expense of economic growth.

Answer 1

1) Exhibit 3
The article is related to Fed policy making and overall economic situation of the US economy which was still recovering after the subprime crisis. Now it is an important fact that although Evan's rule should be implemented, it needs to understand that the economy was still in the recovery mode. Fed will have to gauge the sustainability of job creation and it needs to be flexible sometimes according to the situation and should not be restricted by rules.
However, it is true that the Fed needs to be more transparent to instill confidence in the economy.

2) Exhibit 1
Federal Reserve on its part is trying to infuse liquidity aftermath of the subprime crisis and was trying to recover US economy from the recession. Quantitative easing is something which is infusing liquidity and raising employment. At that juncture, the Fed's credibility should not be questioned.

3) Exhibit 4
Exhibit 4 seems to be more accurate about economic conditions as it discusses inflation as well as unemployment. Higher the liquidity in the economy, higher will be the inflation but lower unemployment and the Fed has to decide on this trade-off
.However, it is a common understanding that persistent high inflation is bad enough for the economy and it needs to be kept under control.

4) Option B
B. the money supply will increase, and the interest rate will decrease

If the FOMC buys government securities from the open market then there will be a rise in liquidity or money supply in the market. Higher liquidity means there will be more loanable funds in the market and so that interest rate will decrease.