Question

Go to the Federal Reserve website and find the latest FOMC meeting press release. Please make sure that it is a FOMC release (Federal Reserve has other releases on its website as well). Read the release carefully. What did the committee decide? How will this decision impact the economy? Relate your answer to what you have learned about dual mandate.

Answer 1

The Press Release of FOMC meeting dated 29th April 2020 focussed on the accomodative stance taken by the Fed Reserve on account of the current global pandemic crisis going on which has resulted in dampened consumer demand, crude oil prices falling and low levels of inflation. Hence, in order to ensure effective economic activity levels, increased employment and overall economic growth, the Fed has decided to set the fed funds rate (which is the rate charged by banks and financial institutions from one other for overnight borrowing) to a target of 0 to 0.25%.

The FOMC has committed to keep this accomodative stance till it is confident of a possible economic turnaround. A decrease in fed funds rate would lead to a greater demand for funds resulting in higher money supply in the economy. This would further result in increased inflation.

Fed Reserve has an obligation to take care of multiple goals like employment maximisation, price stability, and at the same time managing the monetary policy to maintain moderate long term interest rates. This is called the responsibility of dual mandate. In this case where fed funds rate has been decreased to as low as 0%, this will surely help in creating more employment, upholding consumer demand due to increased money supply, however this would also mean that ensuring growth of the economy would take some time and interest rates are likely to fall owing to increase in inflation.