Monetary Policy

Introduction

The Federal Reserve System, often referred to as “the Fed”, is the central bank of the United States. It was created on December 23, 1913, with the signing of the Federal Reserve Act by President Woodrow Wilson. The Fed conducts the nation’s monetary policy by influencing money and credit conditions in the economy. (The Federal Reserve Board, 2006) Monetary policy is one of the tools that the government uses to influence the economy in order to achieve economic stability. The Fed increases or decreases the money supply to influence inflation, unemployment, interest rates and economic growth. (Financial Pipeline, 2006)

State of the Economy

According to the July 2006 Monetary Policy Report to the Congress the economy is currently in a state of transition. The economy has been relatively stable over the past few years even with some of the recent disasters that impacted it such as September 11 and Hurricane Katrina. Inflation pressures have been elevated thus far in 2006. (Bernanke, 2006) This is due to the rise in price of crude oil and its contribution to the increase of energy costs. The rise in price of gasoline and heating oil caused a rise in price of a variety of other goods and services. “Over time, pressures on inflation should abate as the pace of real activity moderates and, as futures markets suggest, the prices of energy and other commodities roughly stabilize. The resulting easing in inflation should help contain long-run inflation expectations.” (Bernanke, 2006) In the beginning of the year, businesses were adding jobs at a robust pace. This caused a noticeable decrease in the unemployment rate. Since that time, the unemployment rate has remained relatively steady.

Another contributing factor to the state of the economy is the recent rise in consumer spending. This rise may be a bit surprising due to the recent inflation caused by the increase in oil prices. This inflation has been matched by an increase in nominal wages and salary income. These increases help keep the economy stable.

Concerns of the Fed

The biggest concern the Fed has is obviously inflation. The rise in oil prices that has influenced a rise in other good and services has been a concern for the past few years. The increase in the rental rate of apartment complexes is another sign of inflation. The prices for houses haven’t been raised all that much due to the increase in energy costs but it is this increase that influences the rise in rental rates. The cost of utilities is often included in the rent, explaining the rise in this rate. The rise in oil prices has influenced nearly everything from the ticket costs of airlines to the shipping costs of delivery companies.