Information received since the Federal Open Market Committee met in September su
ID: 1172917 • Letter: I
Question
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation recently picked up somewhat, reflecting higher energy prices. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee
Explanation / Answer
1. The Fed is concerned about maximum employment and price stability. The Committee fears that without accomodations the market may not be strong enough to generate sustained improvement in the labor marker, aka, maximizing employment.
2. The Fed's plan is to support stronger economiic recovery and ensure that inflation is the rate closest to dual mandate.
3. The current target of the federal funds rate is to increase holdings of securities to $85 billion a month to the end of the year. This will put downward pressure on long-term interest rates, support mortgage markets, and make financial conditions more accommodative.
4. The Committee is attempting to keep a low federal funds rate, 0-1/4.
5. The Fed is engaging in buying securities, thus increasing the money supply to lower interest rates.