Question

In: Finance

If the Federal Reserve believe that the economy is heating up and there is risk that...

If the Federal Reserve believe that the economy is heating up and there is risk that inflation may accelerate, what could they do to slow down economic growth and tighten credit conditions in the economy? What did the FOMC decide in its last meeting?

Solutions

Expert Solution

Federal reserve can use monetary policy to slow down economic rate and control inflation. For this they can increase the interest rates which can simultaneously slow down the economic growth as high the interest rate low will be the money supply.As money supply will come down to the par the demand will decrease which could directly affect the inflation rate to come down. So in order to slow down the economic growth and decrease the inflation rate Federal reserve can use monetary policy. The most important factor in monetary policy also include reducing the money supply in the market which will help to decrease inflation rate.

Now coming to the last FOMC (Federal open market committee ) meeting held as on 29-30 Oct 2019 , below were the key points discussed in the meeting.

1. Monetary policies, strategies, tools and communication process were reviewed

- Committee member reviewed the monetary policies which would provide economic stimulus and bolster inflation outcome in future in which policy rate would be constrained by effective lower bound. They also discussed the policy rate tools which focused on three parameters which where

  • Qualitative
  • Communication challenges
  • Interest rates

- Committee also discussed about the US financial system interest rate compared to the other financial jurisdictions and affect of that on the foreign exchange.

- Committee discussed the benefits and cost associate for purchasing large scale assets, program implemented by federal reserve.

- Committee also discussed the benefits and cost of using different types of balance sheets and agreed that the balance sheet implemented by Federal reserve after financial crisis has eased financial condition and had contributed to economic recovery.

2. Developments in financial market and open market actions

- Committee reviewed the development in financial market over inter-meeting period as early in the period there was slow down in the market

- Committee concluded the outlook for US monetary policy, the open market desk surveys and market based indicator which pointed 25 basis point cut in target range of October meeting.

- Committee also reviewed the money market developments since early October as on October 11 the committee announced its decision to maintain reserves at or above the level the prevailed in September through purchase of Treasury bills and repo agreements. After the announcement the committee conducted regular operation which offered $75 billion in overnight repo funding and around $135 -$170 billion in term funding.

- Committee finished this point by noting that Federal reserve Bank of New York would soon release a request for public comment on plan to publish series of backward looking secured overnight financing rate ( SOFR ) for which the index would depend on LIBOR ( London interbank offered rates ) and publication of this would be done probably in the first half of 2020.

3. Review of operations for repo operation to support the control of the federal fund rate.

- In this committee discussed the recent experience with using repo operations to support the Federal fund rate.

- In this two approach were discussed

  • In first approach the desk would conduct modestly sized, relatively frequent repo operations designed to provide a high degree of readiness should the need for larger operations arise
  • In second approach the FOMC would establish a standing fixed-rate facility that could serve as an automatic money market stabilizer

4. Staff review of the economic situation

- In this committee discussed labour marlet condition and GDP rate for third quater.

This were some points on which the FOMC discussed mainly and ensured to maintain the economic growth and control inflation rate


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