Question

Again, please use www.federalreserve.gov (Links to an external site.)Links to an external site. and find what the current Fed policy is for interest rates. Do you think this policy is appropriate for the economy? Why or why not?

Answer 1

The Federal Reserve pursues policy to promote the goals of maximum employment and stable prices set forth by the Congress in the Federal Reserve Act. During the global financial crisis, the FOMC cut short-term interest rates to nearly zero. To promote economic recovery, the FOMC then undertook a series of large-scale asset purchase programs and used its communications about the path of future policy rates (known as forward guidance). Since October 2009, the unemployment rate has fallen from its peak of 10 percent to 5 percent in November 2015. Fed is currently following Contractionary Monetary Policy but in very small steps. Fed noticed an improvement in the labour market in the end of 2015 and decided to raise the target range for the federal funds rate. Also they are confident that inflation would move back to its 2 percent objective over the medium term. Given the outlook for the economy and the fact that it takes time for policy actions to affect future economic outcomes, the Committee decided to raise its target for policy interest rates. The Committee noted in its statement that monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.

The Fed finished tapering off its quantitative easing program in 2013. That was a massive expansion of the Fed's open market operations tool. Current federal funds rate is 1.75 percent. The Federal Reserve signalled it will raise rates to 2 percent in 2018, 2.5 percent in 2019, and 3 percent in 2020. The rate is critical in determining the U.S. economic outlook.

2008 financial crisis led Fed to lower its benchmark rate to 0.25 percent, which is almost zero. It kept it like that for till Dec 2015 which is for a period of seven years, post which Fed raised interest rates to 0.5 percent. The fed funds rate controls short-term interest rates. These include banks' prime rate, the Libor, most adjustable-rate and interest-only loans, and credit card rates.

The Federal Open Market Committee raised the fed funds rate a quarter point to 1.75 percent on March 21, 2018.

The Fed's first rate increase after the recession was on December 15, 2015, when it raised it to 0.5 percent. The Fed then raised the rate as follows:

• To 0.75 percent on December 14, 2016
• To 1.0 percent on March 5, 2017
• To 1.25 percent on June 14, 2017
• To 1.5 percent on December 13, 2017

The policy is appropritate at the moment. Fed is taking enough steps to check its inflation target of 2%. Since recession in 2008 to 2015, the inflation was averaging about 1-1/2 percent. Inflation was especially low in 2015, held down by declines in energy prices and in prices of non-energy imports.

Inflation-as measured by the increase in the price index for personal consumption expenditure is running below the FOMC's objective of 2 percent, However, with the economy having strengthened considerably inflation will move back to 2 percent as energy and import prices stabilize and the economic expansion continues.