Question

In: Economics

Visit the Meeting calendars, statements, and minutes section of the U.S. Federal Reserve Federal Open Market...

Visit the Meeting calendars, statements, and minutes section of the U.S. Federal Reserve Federal Open Market Committee. If this page does not load, type "FOMC meetings" in the "Search" box located on the U.S. Federal Reserve home page. Next, select a date from any year and click on the “Statement” link. Respond to the following questions by writing 1-2 paragraphs for each item:

What action did the Committee take on this date?

What comments (if any) were made with respect to economic growth and/or core inflation?

Comment on any other concerns or issues indicated in the release.

What impact does this announcement have on the interest rate that could be charged to a company who is trying to obtain a loan to expand its operations?

Solutions

Expert Solution

The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. The Board chair serves as the Chair of the FOMC; the president of the Federal Reserve Bank of New York is a permanent member of the Committee and serves as the Vice Chairman of the Committee. The presidents of the other Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis. All of the Reserve Bank presidents, including those who are not voting members, attend FOMC meetings, participate in the discussions, and contribute to the assessment of the economy and policy options.

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate. Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will remain strong. Inflation on a 12?month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1-1/4 to 1?1/2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

FOMC members had some very real concerns about the implications of making their private deliberations public. Gonzalez was pushing for creating a videotape that would be released to the public in as little as 60 days – something that would virtually prevent any type of true policy deliberation without creating market volatility and likely political pressures on individual FOMC members. Even with a long delay in releasing transcripts, Fed officials were concerned that their open discussion would turn meetings into a more formal and scripted affair. This fear was borne out, at least partially. Even a casual reader of transcripts will see a more formal tone from many FOMC members after they become aware of the transcript process. With these types of concerns, it is not surprising that the Fed’s eventual disclosure policy seemed focused on keeping the transcripts under wraps as long as possible. While several committee members suggested a three-year lag would be sufficient, the Fed opted to hold onto the transcripts for five years – primarily because Greenspan and others felt it was the longest period of time that the Fed could hold them and still have support from the Department of Justice should the Fed receive a Freedom of Information Act (FOIA) request

The Federal Reserve controls the three tools of monetary policy--open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services.

Structure of the FOMC

The Federal Open Market Committee (FOMC) consists of twelve members--the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

All of these questions suggest that there are substantial internal political issues that will surround any change in the structure of how policy is formulated or implemented. At stake is the balance of power within the Federal Reserve system between the Reserve Banks and the Board of Governors, and this will clearly take time to work out and will likely play out behind closed doors. Given the significance of the issues, it is also unlikely that the existing five governors, one of which is a lame duck, and FOMC will get down to the hard issues until after the three new governors are confirmed, are on board, and have had time to come up to speed on the issues.

The combination of downside risks, continued slack in labor markets, and low inflation, coupled with very significant issues that must be resolved before the Fed can even think of beginning its exit strategy, suggests that rates will indeed remain low for a period of time that will stretch at the very least well into next year or even beyond.


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