Policy Response Paper for the Federal Reserve and Monetary Policy

The instructions for this 2 page essay were as follows:

Go to the the Web site that offers Federal Reserve News and Events. Follow the "Press Releases: Monetary Policy" 2008 link and read the most recent "FOMC statement." What is the FOMC's recipe for monetary policy? Explain why you do or do not support it.

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The two page response essay is reproduced below. You can purchase it if you wish to use it.

The latest FOMC statement from the Federal Reserve (2006) comes from the press release dated September 16, 2008, where the Federal Reserve agreed to maintain the target rate at a significantly low 2 percent. However, this policy is certainly debatable as there can be arguments on both sides which show how a low rate can help an economic system in trouble for the short run but could be very bad in the long term where economic bubbles could be created as the rate is below inflation levels (Torres and Kennedy, 2008).

The reasons given for keeping the low rate are simple enough. Economic realities and the current situation of the market have created an environment where the finance industry of the American economy is quite strained. The labor market has also experienced a weakening with time as unemployment levels are high. Economic growth is not only slowed, there may be chances that the economy could be going towards a depression. Household spending is being curtailed as people are unsure about the future economic situation of the country as well as their families.

Further, the credit conditions for many banks and lenders have been toughened up and that makes it difficult for people to get easy credit from banks. The slowdown in the real estate and housing markets as well as a reduction in the growth of American exports has created pressure on the economy. In such circumstances, it is reasonable to say that the Federal Reserve has made a good move to keep a loose monetary policy which should help the liquidity situation of the market while giving the economy room to grow.

However, the decision to keep interest rates at such a low level can also be questioned in economic terms since the current interest rates are below inflation. In economic terms, the Federal Reserve has made it cheaper to borrow money than the cost of inflation itself. Torres and Kennedy (2008) note that such situations may be considered emergency measures since there are substantial risks being taken by the Federal Reserve to set this low rate.

These risks include the risk of a large number of investors becoming more willing to invest in risky ventures as the rewards for keeping money in the banks is quite low as compared to the possibility of returns from stock markets or other positions where the rewards are higher. However, such actions can create bubbles where a lot of investors suddenly to invest in securities which carry more risk and they can pull out their investments if the rates come back to a high point. This means that even though the steps taken by the Federal Reserve could be necessary, they have to be carefully evaluated and monitored before they can be deemed successful. Perhaps that could only be realized a few months from now when the economic crisis is over and a final answer could be given regarding the moves made by the Federal Reserve.

Works Cited
Federal Reserve. 2008, ‘FOMC statement’, [Online]

Torres, C. and Kennedy, S. 2008, ‘Fed May Cut Rate Below Inflation, Risking Bubbles ‘, [Online]

Other Details about the Project/Assignment
Subjects: Economics -> US Economy
Topic: Response Paper for the Federal Reserve and Monetary Policy
Level: College / University
Tags:

Response Paper, Federal Reserve, Monetary Policy

Price: $1.95

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Project Details

Subjects: Economics -> US Economy
Topic: Response Paper for the Federal Reserve and Monetary Policy
Level: College / University
Tags:

Response Paper, Federal Reserve, Monetary Policy

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Policy Response Paper for the Federal Reserve and Monetary Policy

Response Paper, Federal Reserve, Monetary Policy

Response Paper, Federal Reserve, Monetary Policy