Question

What kind of monetary policy has the Fed been conducting recently, and why? Explain briefly how this policy is aimed to affect inflation, employment and aggregate demand. (Hint: you may want to look up recent FOMC announcements.)

Answer 1

Fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. It was 2.5% in March 2019.This low rates show expansionary monetary policy.

They are keeping Federal funds rate at low levels making sure that banks are left with enough liquidity. It is generally done during recessionary cycles. Federal funds rate also affects the prime rate. If inflation goes up then Committee may decide to take these rates up. This move of keeping Fed funds rate at low levels makes money supply to increase and helps to decrease interest rates.

Decreased interest rates encourage investors and people to borrow more and spend more and hence aggregate demand increases generating more jobs in an economy. Both producers and consumer are better off if they are investing but worse off if they are saving money in banks. If economy has 'spare capacity' in the form of unemployed factors of production then even if demand for more production goes up the inflation may not have impact. If economy has already saturated and no spare capacity is available then inflation will increase due to rising demand for money as interest rates are down.