Goals of the Monetary Policy

The latest statement by the Fed was released on 25 January 2012. In the statement, the Committee states that it kept the current fund rate at zero to ? percent (Federal Reserve, 2012). It also extended the average maturity of its holdings. Moreover, the Committee continued reinvesting principal payments from its holdings. The reinvestment saw the Committee continue to purchase agency-mortgage backed securities and increase the maturity of Treasury securities (Federal Reserve, 2012).

The Feb decided to keep a low fund rate because it wanted to stimulate more activity in the economy. The subdued outlook of inflation over the next few years informed the Fed’s decision (Federal Reserve, 2012). In addition, the relatively high levels of unemployment necessitated the maintenance of low fund rates to increase of money supply in the economy. In its latest statement, the Committee notes that although household spending increased, there was no growth in the fixed income sector (Federal Reserve, 2012).

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Household expenditure affects the short-term demand of goods and services. On the other hand, fixed investments have a significant impact on unemployment levels. The committee was using the above knowledge, when it decided to keep low fund rates. The low fund rates would sustain the affordability of capital necessary for business fixed investments (Federal Reserve, 2012).

In the last two years, the Fed was trying to achieve price stability and full employment in the economy, using its monetary policy. It purchased additional long-term securities in its long-term security purchase program (Federal Reserve, 2011). It also increased the amount of money circulating in the economy.

The economic basis of the Fed’s policy action was to influence the supply of money in the economy to support investments and ease unemployment. The Fed also has the mandate to retain stability in prices. It offers low fund rates and purchases securities to offer guarantees to investors.

Purchasing of securities by the Fed makes it possible for investors to predict future prices of investments, and this eases their short-term speculation. The desire to maintain low unemployment by increasing avenues for creation of jobs in the economy led the Fed to maintain a historical low fund rate of 0 to ? percent (Federal Reserve, 2011).

Concerns

Economic Growth

The Fed holds the opinion that economic growth slowed down in 2011 because of the emerging weaknesses such as high unemployment. Nevertheless, the sustenance of the monetary policy would lead to a modest acceleration of the economic growth in 2012. The progression would come from lower commodity prices and increased spending because of easier credit conditions (Federal Reserve, 2011). The concern here is that the actual economic growth rate of 2012 would be lower than earlier expected.

High Unemployment

Concerns on high unemployment show that it is expected to slow down, albeit at a slower rate than previously anticipated (Federal Reserve, 2011). However, the economy will still witness high unemployment levels in the future as current monetary measures take time to shape the economy. We can conclude that the Fed will not be able to tame high unemployment in the coming few years.

Price Stability

The fed is anxious about the effect of supply disruptions from international producers such as Japan (Federal Reserve, 2011). It expects temporary inflation setbacks due to these disruptions. However, it still expects the projected economic recovery to subdue the brief pressures. Hitherto, the Fed is not sure whether there will be additional supply disruption to affect prices.

International Balance

The persisting fiscal snags in Europe are negatively upsetting the market emotion and have led to widespread investor pullback from high-risk assets (Federal Reserve, 2011). The Fed’s anxiety is that the longer it takes to resolve the international problems, the harder it will be for the US economy to recover fully.

References

Federal Reserve. (2011, July 13). Part 1: Overview: Monetary policy and the economic outlook. Retrieved February 22, 2012, from http://www.federalreserve.gov/monetarypolicy/mpr_20110713_part1.htm

Federal Reserve. (2012, January 25). Press Release. Retrieved February 22, 2012, from http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm