Question

What are the stated objectives of the Federal Reserve System? What metrics would you use to determine the success, or failure of our central bank?

Answer 1

The U.S. Congress established three key objectives for monetary policy in the Federal Reserve Act:

• Maximizing employment,
• Stabilizing prices,
• moderating long-term interest rates.

Also to be responsible for monetary policy with two congressionally mandated objectives:

• Keep inflation at a reasonable rate
• Keep unemployment at a reasonable rate

Although Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions

Maximum sustainable employment is the highest level of employment that the economy can sustain while maintaining a stable inflation rate. Prices are considered stable when consumers and businesses don't have to worry about rising or falling prices when making plans, or when borrowing or lending for long periods. When prices are stable, long-term interest rates remain at moderate levels, so the goals of price stability and moderate long-term interest rates go together.

The Fed seeks to achieve its monetary policy mandate by influencing interest rates and general financial conditions. For example, by keeping policy interest rates low, the Fed makes homes more affordable for consumers and makes it cheaper for businesses to invest, expand, and hire. And by raising policy interest rates when inflation pressures are building, the Fed helps to cool the economy and preserve price stability.

In a crude way we can compare different economies which have some common factors such as – GDP , economy size , Debt etc and benchmark them and see how fed has performed given the factors.

Some of the metrics that could be useful are

1. Inflation growth and expected Inflation
2. Weaker Dollar – Currency performance
3. GDP Growth
4. Lending
5. Yields on Sovereign bonds