FOMC Monetary Policy Statement On Thursday (Sept. 17th) the Federal Open Market
ID: 1169068 • Letter: F
Question
FOMC Monetary Policy Statement On Thursday (Sept. 17th) the Federal Open Market Committee [FOMC] (a committee within the Fed that is in charge of overseeing open market operations) released their most recent policy statement, which outlines the committee’s stance on monetary policy. Refer to the FOMC’s statement in answering the following questions: http://www.federalreserve.gov/newsevents/press/monetary/20150917a.htm
a. In the second paragraph of the statement, the FOMC says they expect that “economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.”
(i) What do they mean by a “dual mandate” (that is, what policy objectives are included in this mandate)?
(ii) Does the European Central Bank (ECB) also have a dual mandate? If not, which policy objective does the ECB focus on? (for this question, refer to Wright 17.2 [starting on pg. 358] as well as any other sources that find helpful).
b. In the FOMC’s policy statement, what did the committee announce as its target range for the federal funds rate (ffr) ? Is this target different from the previous ffr target?
c. If the FOMC decides to raise the ffr target, it would be doing so out of concern for which of its policy objectives? (i.e., which part of the dual mandate would the Fed be focusing on?)
Explanation / Answer
Answer:
2) a) In the given excerpt, the term “dual mandate” refers to the dual policy objective of obtaining the goals of maximum employment and achieving price stability. These two objectives are clearly highlighted in the policy initiatives as the dual mandate of the policy making body.
b) It is indeed true the ECB has a dual mandate. In such a provision, inflation targeting holds a relatively weaker position and there is complete acceptance that the monetary policy may have an influence on economic activity prevailing in the economy. Also, this implies that there may be a trade off between conflicting objectivities on which the decision is to be taken by the policy makers. Thus, certain objectives have to be kept in consideration while deciding the policy moves.
b) The policy makers decided to keep the ffr at the then prevailing 0 to ¼ percent target range. This was in accordance to the objective to achieving price stability and high employment. This was the same as the previously holding ffr. It was decided that the target range would be changed after observing the current effect on the state of employment and the level of inflation which was supposed to be maintained at 2%.
c) IF the FOMC decides to raise the current target ffr it would be completely out of the concern for the improvement in the labor market and that inflation will return to its 2%objective over the medium term.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.