Monetary Policy

According to Federal Reserve Board site (2005) ”…the term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy”(Federal Reserve Board 2005).

Under the control of the Federal Reserve are three tools of monetary policy - open market operations, the discount rate, and reserve requirements. Use of these three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate (interest rate at which depository institutions lend balances). Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and prices of goods and services (GDP).

According to the Monetary Policy Report to Congress (February 2005), the current state of the economy ..” fiscal policy stimulative, monetary policy accommodative, and financial conditions favorable, household spending remained buoyant and businesses increased investment in capital equipment and inventories, despite the restraint imposed by sizable increases in oil prices. Labor market conditions improved significantly, albeit at an uneven pace, and productivity rose notably further. Consumer price inflation moved higher with the surge in energy prices, but core consumer price inflation (that is, excluding food and energy) remained well contained, and measures of expected inflation over longer horizons held steady or edged lower.” According to this level of interpretation, the economy is stabilized and making a turn for the better.

The report seemed to focus predominately on the state of inflation and how it was fluctuating. The focus seemed to converge upon oil prices and how they have not receded as predicted. As the Committee’s focus upon the inflation and expenditures of the year, notation was made towards the future: “the Committee saw the economy as growing at a pace that would reduce margins of slack in the utilization of resources. The Committee also judged that inflationary pressures would likely be well contained if monetary policy accommodation were gradually withdrawn. The Committee's decision to raise its target for the federal funds rate from 1-3/4 percent to 2 percent with minimal change in the language in the accompanying statement was largely anticipated by financial markets and elicited little reaction” (2005).

The Committee apparently isn’t going to do much of anything when it comes to monetary policy. They will continue to