Fed’s Concerns

The Federal Open Market Committee are concerned the slow economic growth being experienced in the recent months, the high unemployment rate in the country, the house requirement are increasing as depicted by the increased house spending. This increase might results in housing shortages as there is no corresponding increased investment in the fixed investment. The rate of inflation has also gone up consequently pushing the cost of energy to also rise. Further fed’s concerns are the lack of sufficient policies to help realize a strong economic growth to improvement in labor market conditions.

Fed’s plans

The fed’s plans in ensuring a strong economic recovery and containment of a long-term inflation rate at an acceptable levels are to ensure they increase its holding of the long term securities through continued acquisition of more agency mortgage-backed securities at a pace of $40 billion per month. The continued extension of the maturing holdings of the treasury securities and effects its policy of reinvestment of the principal payments from the holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

With the measures taken, the committee hopes to increase the holdings of longer-term securities by a value of about $85 billion monthly to the end of the year. The measures would further ease pressure on long-term interest rates, sustain mortgage markets, and would help to improve the financial condition.

Fed’s plan to monitor the situation for any notable improvements and if there is no notable improvements in the labor market and the housing sector the fed would invest in fixed investment and further trigger other Fed’s tools.

Current target federal fund rate

To maintain it at 0 to 1/4 percent. The Fed Fund rate is the interest rate banking institutions and other financial institutions loan funds to one another. The banks are required to keep part of the customers’ money on reserve or maintain a given amount on its reserve. This is the amount of money that Fed uses to influence the amount of money available for financial institution to lend to the public.

Decision regarding the federal funds

The fed’s decided to retain the projected range at zero to ¼ % and hopes for a reduction of the federal funds rate through to 2015

Fed’s Open Market Operation (OMO)

The Fed utilizes open market operations to alter the supply bank’s reserve. The Fed engages in sale and purchase of financial instruments such as treasury, agency’s and government sponsored securities (Thornton, 2004). The Fed trades the securities in the open market together with other financial institutions. The OMO is also referred to as the secondary market for securities purchases (Thornton, 2004). Through the adjustment of the banks’ reserve in the open market may be used to further influence the amount of money available for the banking institution to lend to the public. Thus, this can be an effect tool for the Fed to control the rate of inflation to acceptable levels.

References

Thornton, D. L. (2004). The Fed and short-term rates: is it open market operations, open mouth operations or interest rate smoothing?. Journal of Banking & Finance, 28(3), 475-498.