The Federal Reserve Monetary Policy

The Federal Reserve Monetary Policy

Beginning in 2001 there was extra attention and American plus global eyes on the Federal Reserve, one often heard, 'the Feds are lowering interest rates again' but what does that really mean? In recent memory, 2001 had the greatest impact on the economy due to the events of September 11th and the consequential impact on virtually every branch of the U.S industry and global economy. According to the official website for the Federal Reserve, "the Federal Reserve sets the nation's monetary policy to promote the objectives of maximum employment, stable prices, and moderate long-term interest rates. The challenge for policy makers is that tensions among the goals can arise in the short run and that information about the economy becomes available only with a lag and may be imperfect." (Anonymous 2005) Thus adjustments made to stabilize or regulate the economy slowly impact the economy and there may even be resulting readjustments necessary in order to meet the intended goal. The Feds as the agency is affectionately called, influence economy greater than all the areas, which play into the economic, bottom-line of U.S. monetary policy. The Feds in a sense stir the pot of soup when it is necessary to bring varying ingredient up to the top in order to stimulate better digestion of the dollar into the economy, so to speak.

The goals of monetary policy are spelled out in the Federal Reserve Act, which specifies that the Board of Governors and the Federal Open Market Committee should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Stable prices in the long run are a precondition for maximum sustainable output growth and employment as well as moderate long-term interest rates. When prices are stable and believed likely to remain so, the prices of goods, services, materials, and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living. Moreover, stable prices foster saving and capital formation, because when the risk of erosion of asset values resulting from inflation--and the need to guard against such losses--are minimized, households are encouraged to save more and businesses are encouraged to invest more. (Anonymous 2005)

State of the Economy

The current state of the economy as determined from 3Q reports state that:

The data released over the past two months or so accord with the view that the earlier soft readings on the economy did not presage a more serious slowdown in the pace of activity. Employment has remained on an upward trend, retail spending has posted appreciable gains, inventory levels are modest, and business investment appears to have firmed. At the same time, low long-term interest rates have continued to provide a lift to housing activity. Although both overall and core consumer