Monetary Policy Federal Reserve

Monetary Policy Federal Reserve

Federal Reserve Board is steadily increasing the interest rates in recent years due to the sharp rise in inflation. In other words, inflation is the main important factor that forced to raise interest rates. It has been noticed first time in 2001, that Federal Reserve has made unprecedented increase in interest rates. The main objective of Fed to cut interest rates is to control or restrict the flow of money in the economy and indirectly to control spending by the peoples. The change in the interest rates by the Fed for the constant years is able to achieve its objective to some extent.

However, some economist’s states that Fed should not increase interest rates as it creates moral hazard and encourages taking greater risk, borrowing more and saving less. Therefore, the Central Bank is always advisable to adopt more ease policy or reduce interest rates as long as inflations remain modest and must be set up in relation to deviations in both output and inflation on desired levels.

The Federal Reserve goals for monetary policy are to seek price stability, maximum sustainable economic growth and moderate long-term interest rates. These are the primary focus of every monetary policy and directly affect it’s the decision of Fed. The plan is largely affected by the labor force which is determined by specified demographic factors. It is very much affected by growth of productivity, economic growth, inflation and interest rates.

The Federal Board over some past years has been constantly raising interest rates, but in recent months it is trying to edge down interest rates since the summer 2006 and also deciding to keep the inflation low ahead. In the recent Fed meeting, it is concentrated upon to change the basic picture of the economy with help of increasing exports and demand of products in world market.

To increase the output at a high speed, to expand jobs and incomes at fast pace and to reduce the underlying stock and to strengthen future economic growth. To gain the confidence of more and more investors by providing effective market conditions, high quality loans at flexible rates. The Fed is also planning to support and promote sustainable growth and price stability and to ease policy to offset the effect of tighter credit conditions and to encourage moderate economic growth over time.

REFERENCE

Referred to sites:-

Invention, Productivity, and the Economy

Speech by Federal Reserve Vice Chairman Donald L. Kohn at the Greater    Philadelphia Chamber of Commerce 207th Annual Meeting, Philadelphia, Pennsylvania
Dated 11th October 2007