Federal Reserve

Describe the Federal Reserve’s assessment of the current economic activity and financial markets.

According to the testimony of Chairman Ben S. Bernanke, ( June 2011) predicting the economic activity is difficult, because of declining income, limitations on credit, along with the possibilities of household cut backs, save and pay down debts, make the assessment more difficult. The state of affairs of the financial markets started to improve during 2009 due to policy actions taken by the Federal Reserve along with other agencies. Still financial markets and financial institutions remain under stress. The credit situation has put a strain on the economy activities. If there is not a strong commitment impose on fiscal sustainability in the long-term, financial stability and economic growth will show no improvement.

Explain the Federal Reserve’s current view about inflation.

Since the Federal Open Market met in March the information received is that the recovery of the economy is happening at a moderate pace. The labor market is improving slowly, household spending, business investments for equipment is expanding, yet investments in structure outside of housing is still weak and, crude oil has contributed to more increases in the price of oil.

Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still passive. In order to foster a stronger pace of economic recovery and to make sure that inflation, over time, is at levels in consistency with its mandate, the Committee will continue to expand its holdings of securities. The committee is continuing to monitor the economy viewpoint.

Describe the monetary policy tools the Federal Reserve uses to stabilize the economy and maintain price stability.

Open Market Operations is the most commonly used tool for implementing monetary policy. The purchases and sales of securities play a major role in determining the federal funds rate. The interest rate depository institutions lend balances at the Federal Reserve to other depository institutions. The federal funds rate affects monetary and economic conditions that influence employment, output, and the price level.