Question

Explain how each of the indicators above assist in the decisions made by the Federal Reserve Open Market Committee? How do these indicators contribute to the research needed to determine cause and effect and how are these indicators currently calculated?

Indicators: GDP, CPI, Unemployment and Home Sales, along with your understanding of the role of the Federal Open Market Committee

Answer 1

The Federal Open Market Committee or FOMC as it is known is responsible for open market operations. The FOMC carries out open market operations such as buying or selling treasury bonds on behalf of the Fed to influence the money supply and interest rate in the economy. The FOMC tracks economic events and indicators closely to gauge the direction of the economy and takes steps to control its course. The indicators such as GDP, CPI and unemployment are quite important in this case.

The GDP numbers are one of the most important as it shows the growth in the economy. If the GDP is growing as per the expectation then there is no issue but if it is below then FOMC may decide to buy treasury bonds from the market which could increase the money supply in the market. The FOMC also focuses on overheating of the economy and could purchase bonds to slow down the growth of an overheated economy.
This is gain true about home sales which are GDP is a positive indicator of economic growth and higher level is an indication of the stronger economic situation. However, an unexpected rise in home sales could also spell trouble in the form of an asset bubble. The FOMC may raise the interest rate through open market operation by selling treasury bonds in the market.

The CPI or consumer price index and unemployment are kind of different indicators as the rise in these two is a cause of concern in the economy. The CPI erodes the buying power and rising unemployment means the economy is running well below its potential.
The CPI which is nothing but the inflation can be controlled by decreasing the money supply and so the FOMC can sell treasury bonds in the market to reduce it.
Unemployment has the exact opposite situation. The FOMC can buy treasury bonds from the market which increases the money supply and lowers the interest rate which means easy credit and that fuels consumption, production and job market.