Question

Given what you know about the current macroeconomic conditions, what would you suggest the Fed do for monetary policy? Should the Fed raise the federal funds rate, lower it, or keep it at current levels?

Answer 1

Current Macroeconomic Conditions (CMC) develops and maintains a suite of modern and innovative forecasting models that can be used to conduct real-time inference about current and future U.S. macroeconomic conditions along dimensions that are particularly relevant for monetary policy.

In the short run, monetary policy influences inflation and the economy wide demand for goods and services—and, therefore, the demand for the employees who produce those goods and services—primarily through its influence on the financial conditions facing households and firms

The Federal Reserve raises or lowers interest rates through its regularly scheduled Federal Open Market Committee. That's the monetary policy arm of the Federal Reserve Banking System

The FOMC sets a target for the fed funds rate after reviewing current economic data. The fed funds rate is the interest rate banks charge each other for overnight loans. Those loans are called fed funds. Banks use these funds to meet the federal reserve requirement each night. If they don't have enough reserves, they will borrow the fed funds needed.Since the banks set the rate, the Fed is actually setting a target for the fed funds rate. By law, the banks can set any rate they want. But this is rarely a problem for the Fed. Banks meet the Fed's target because the nation's central bank gives them several strong incentives to do so.

• The Fed changes the money supply by adjusting the target fed funds rate
• The Fed uses monetary tools such as the reserve requirement, discount rate, and open market operations to encourage banks to reach its target rate
• The Fed created a new monetary tool called reverse repos to further manage the target fed funds rate