Monetary Policy
...ct (GDP) growth has rebounded smartly from the 2001 recession, and slack both in labor and product markets has eroded appreciably. After a substantial period of little or no increase in employment, payroll gains have Monetary Policy 3 picked up to an average of 160,000 per month over the past half year and the unemployment rate has fallen to 5-1/4 percent, almost 1 percentage point below where it was two years ago” Governor Donald L. Kohn (2005). Also, the rise in energy and gas prices has taken a toll on consumer confidence and spending most recently, but with financial conditions still accommodative, profits and cash flow is still healthy, therefore most forecasters expect growth to remain solid. Federal Reserve Issues Beginning in 1979, the government began paying more attention to inflation. I believe that the Fed is concerned about inflation and consumer spending. “It is important for the Federal Reserve to find the balance between its short-run goal of stabilization and its longer-run goal of maintaining low inflation” (Governor Laurence H. Meyer 2001). When a state or region goes through a recession, the national economy looks at the state or region that is going through inflation. The reason being is because the monetary policy works through credit markets and since credit markets are linked nationally, the Federal Reserve has no way to direct incentives to that particular part of the country that needs help. Also, if the Federal Reserve moved whenever any state had economic hard times, it would be stimulating much of the time, which would cause an excessive stimulation for the overall country and higher inflation will probably occur. In December 1965, Chairman Martin supported an increase in the discount rate as an appropriate step to contain the risk of higher inflation. Also, in the speech of Governor Laurence Meyer, he remarked that a vote occurred on a proposed increase in the discount rate December 3 2000. Monetary Policy 4 Another issue or concern of the Federal Reserve is about “future inflation”. People’s expectations about “future inflation” may affect the policy for example, if monetary policy was straightforward then consumers and business people may ask for larger increases in wages and prices, which would cause inflation to increase without big changes in employment and output of production (Orphanides and Williams, 2002) Direction of Recent Monetary Policy The Federal Reserve interpreted its mandate to be the promotion of monetary and credit conditions that would foster sustainable growth and a stable value of the dollar. These goals were stated in terms of maintaining long-run growth of monetary and credit aggregates that would promote maximum employment, stable prices, and moderate long-term ...