Working with Federal Reserves Publications - Essay Example

?Running Head: Assignment #8 – Working with Federal Reserve’s Publications Working with Federal Reserve’s Publications Date: 1. Describe the Federal Reserve’s assessment of the current economic activity and financial markets. Decisions made by the financial markets are generally based on the monetary policies that are disclosed by the Federal Reserve’s Federal Open Market Committee or FOMC (Ehrmann et al 2007). In the past Central Bankers have traditionally been close-mouthed and the Federal Reserve was often reluctant to state publicly what its current policy directive is; what its idea about future monetary policy actions including its predictions in relation to general economic conditions or interest rates (Ehrmann et al 2007). Hence periodic or regular publications may provide some detailed analysis of monetary policies for the preceding moths or years but does not divulge any information details regarding current of future polices. The conventional or common practice of the Federal Reserve in keeping quiet about present and future monetary policies have change recently becoming more transparent such that after meetings the Federal Open Market Committee (FOMC) publicly relates monetary policy decisions and central bank forecasts, which also includes justifications for any changes that were or are made (Ehrmann et al 2007). The justifications include considerations taken that resulted to the decision over the changes done on the said monetary policies. The trend of the economy and financial markets generally rely on the monetary policy standpoint and balance-of-risks appraisal of the Federal Reserves or Central Bank’s public statements in connection to inflation and other forms of economic circumstances. The transparency adopted by the Federal reserve lessens market uncertainty with respect to any future monetary policy. However, the Federal Reserve has an option to change its perception and views after making a public announcement regarding its policies. But even with the data or information made available on prior and future monetary policies, a precise determination of the effects of such policies on the general economy and its financial markets can be hard to identify mainly due to other economic factors that can change overtime. 2. Explain the Federal Reserve’s current view about inflation Inflation usually occurs when there is an excess demand, when prices rise when total spending made by consumers, business firms and the government go beyond the value of the total amount produced within a given economy (Roberts 2006). In relation to this, changes in monetary policies as well as fiscal policies contribute greatly to the level of demand which is affected by government purchases, total consumption and investments made (Roberts 2006). However, this has no actual connection to the price level that is similar to the actual price of a single commodity; especially if all other changeable factors are constant like income (wages) and the prices of other goods. The collective price level normally indicates that all other prices are shifting as well. Therefore, incomes usually rise and fall with the level of prices because income is obtained from the price and quantity of goods sold (Roberts 2006). Issues regarding shifts or changes in the economy are quite complicated sine in real terms output in answer to demand cannot increase beyond the full level of employment which triggers an increase in spending that can merely be attained at higher prices. This can be illustrated in the Philips curve where total demand can be slimmed down or increased in tandem with supply in order to attain full employment output with supply in order to attain full employment output with stable prices. Reality wise, demand is affected by difference in government spending and taxation (fiscal policy) or by the variation s in monetary factors that affects business investment spending. As a whole, it is difficult for the Federal Reserve to settle on the appropriate monetary and fiscal policy to be implemented. The reason behind this is because a policy of credit ease formulated to elevate demand to full employment level output also increases price levels of goods. On the other hand, a policy of monetary restraint intended to avert inflation requires going through layoffs or unemployment (Roberts 2006). To be able to attain an overall balance within the economy and deter inflation the Federal Reserve seeks stability in the balance of payments, full employment and price consistency that may necessitate adjustments in monetary/fiscal policies and exchange rates. 3. Describe the monetary policy tools the Federal Reserve uses to stabilized the economy and maintain price stability. The Federal Reserve finds means and ways to control the total supply of money and credit and the general level of interest rates. However, it does not try to find control in the amount of credit flowing into different uses and the prevailing interest rates for certain kinds of loans and securities (Gurkaynak et al 2005). While the Federal Open Market Committee (FOMC) statements regarding monetary policy actions have a profound effect on the stability of the economy in general the presence of current federal funds rate target factor and the future path of policy factor are relevant aspects to the changes in statement made by the Federal Open Market Committee (FOMC) (Gurkaynak et al 2005). The factors mentioned in the preceding paragraph are taken into consideration upon the implementation of mortgage credit control and consumer credit control per se. The mortgage credit control as a selective control tool is based on the assertion that the kind of credit involved is not affected by any general credit conditions, Consumer credit control is usually utilized since an increase in consumer credit also means an increase in the expenditures of consumers that adds to the pressures of inflation in the economy. Consumer credit is related to installment purchasing or buying, which many consumers avail of and is not affected by general credit controls. This means that consumer credit or installment buying can be directly controlled by increasing interest rates and requiring substantial down payment. By curtailing installment buying, total spending on durable consumer goods is restricted helping to minimize the possibility of a recession in the economy (Gurkaynak et al 2005). 4. Based on the information you researched from Federal Reserve publications, present and justify your own economic outlook for the next twelve to eighteen months. The last couple of years saw a big downfall in the economy where majority of home mortgages were not paid and unemployment made it difficult for families to cope up with their daily expenses let alone pay monthly loans for their homes, if it was mortgaged. The recession, which also affected the entire global economy, was an offshoot of various economic factors that resulted from the high overhead expenses that went over the government’s fiscal budget; and the offshore investments made by corporations to save on personnel wages and other expenditures. Unfortunately, the offshore investments that were made entailed unemployment and cut-off hours for those with jobs. For the advance countries of the world having a downturn in the economy can be greatly felt by its citizens since they are used to having better times and have a higher purchasing value of their money. This is in contrast with developing nations who are used to having hard times economically speaking and are dependent on the advance nations. The global recession as a whole has adversely affected the balance of payments of nations worldwide including the gross domestic product (GDP) of every country engaged in an open trade system. GDP is the summation of four types of spending: gross investment, consumption, net export of goods/services and government spending. A surplus or positive balance is achieved by a country who has given more goods/services to foreigners than it has received abroad. Since the economy as a whole has already taken a worst downfall a second plunge is not necessarily forthcoming within the next twelve to eighteen months. The rationale behind this is because monetary policy controls have already been undertaken and is currently in place, but will not still be as good as before because it takes time to make the policies work and more time to attain the stability desired. Nevertheless, governments must take into detailed consideration that monetary policies and fiscal policies may have to be adjusted as the economy rolls along. Policies that constrict a certain aspect of the economy normally increase another aspect; hence obtaining a balance is difficult especially if expenditure often outweighs income and investment. And so, adjustments are necessary to address short term issues within the economy while simultaneously establishing long term solutions that can be infused slowly to prevent the occurrence of recession again in the future. References Ehrmann, M. and Fratzscher, M. (2007). Transparency, Disclosure, and the Federal Reserve. International Journal of Central Banking. Retrieved from http://www.ijcb.org/journal/ijcb07q1a6.pdf Gurkaynak, R., Sack, B. and Swanson, E. (2005). Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary policy Actions and Statements. International Journal of Central Banking. Retrieved from http://www.ijcb.org/journal/ijcb06q3a6.pdf Roberts, J. (2006). Monetary Policy and Inflation Dynamics. International Journal of Central Banking. Retrieved from http://www.ijcb.org/journal/ijcb05q2a2.pdf Read More