Federal Open Market Committee Members on Present Economy

Introduction

The members felt that economic activity has been expanding at a commendable pace. Apparently, the rate of unemployment had declined with steady job gains indicating improvement of the labor market. The members also noted that underutilization of the labor resources is continuously reducing. They expect that real economic activity will grow at a moderate speed that is enough to cause further improvements in the labor market conditions. The members at the meeting felt that the level of household expenditure is increasing at a moderate rate. The recent decreased oil prices that have boosted the purchasing power of households were cited to have the potential to reduce consumer expenditure in future. Other elements considered as facilitating household expenditure comprised relaxed credit standards, continued gains, low-interest rates and in income and employment. Nevertheless, the associates acknowledged that recovery encountered within the housing industry was slow and that nominal wage development if sustained, would convert into a considerable restrictive constituent for household spending.

Members also took a keen interest in the financial situation of the country. In spite of the strengthening economic outlook and the expectations that policy normalization would start later in the year, members noted substantial fall in the nominal longer-term interest rates as well as its implications. The meeting participants believed that fund shifts from other countries into the United States Treasury securities might have had a hand in decreasing term premiums. In turn, the changes might have partly caused reduced yields in foreign sovereign in response to forecasted and actual monetary policy actions outside the United States. A good number of the members felt that the decline in the real interests, in the long run, tends to make the financial conditions of the country more accommodative. Consequently, this would lead to a higher path as far as the federal funds rate is concerned, going forward. A given percentage of the committee members argued that, even though the experienced shifts show concerns regarding the growth prospects abroad, the effect of this on the monetary policy of US wasn’t as clear as it would have been required. They figured in the accommodative strategy movements by numerous overseas central banks as one of the things that had reinforced the stance overseas.

Actions Underway

Firstly, it agreed that the target range for the federal funds rate would be maintained at 0-1/4%. The period within which this objective range would be retained was not specified as it would be dependent on the committee’s analysis of the actual and anticipated progress pertaining to the maximum employment objectives of 2% inflation. Secondly, the reinvestment of principal payments was maintained. This entails mortgage-backed securities and agency debt. This policy will substantially help in the maintenance of accommodative financial conditions. Lastly, the committee members decided that even after employment and inflation nears mandate consistent degree, the state of the economy may allow the target federal rates to be maintained at the levels below their view – as normal, at least in the long term.

Current Risk Assessment

The meeting participants had a chance to present identified potential risks to the financial stability of the economy. Some of the risks include:

  1. Higher capital levels and the liquidity of the banking sector
  2. The degree of maturity transformation in the financial sector is moderate
  3. The borrowing nature of the nonfinancial sector is considered relatively subdued
  4. Presence of valuation pressures in the asset markets because of the potential rise in prices and the easing of the lending standards on the CRE loans

Possible emergence of liquidity pressures due to the growing role of loan and bond mutual funds and other factors.

Proposed Committee Policy Action

If the FOMC were to continue with the current action at present, I would vote Yes- at least in the meantime. This is mainly because; the period within which the Fed funds rates will remain 0-0. 25 percent is not exactly specified. It is, however, dependent on the outcome of the analysis performed by the committee on the forecasted and actual progress towards the maximum inflation rate of 2 percent. Secondly, the policy of reinvesting principal payments will go a long way in helping to maintain accommodative financial conditions in the short term. On the other hand, the unconventional policy has been around for far too long. According to Labornte (2015) the global economic recession came to an end in June 2009. This means that the economy has been enjoying a steady rise since then. Further, the rate of unemployment is no longer abnormally high and has also decreased since 2011.

On the same note, even though inflation has remained relatively low for quite some time, the unconventional policy has resulted in above average rise in the money supply – a factor that is likely to cause price instability. The US economy is performing almost regularly. In that case, the risks of maintaining a highly stimulative strategy by the central bank far outweigh the prevailing benefits. Should inflation fail to fall, the Federal Reserve may have to consider raising the interests rate. In that regard, if the rate of inflation fails to moderate, additional firming should be implemented.

Reference

Labonte, M (2015). Monetary policy and the Federal Reserve: Current Policy and Conditions. Congressional Research Service.

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