Us Economy Strengthens: FOMC Reduces Inflation With Policy Accommodation - Essay Sample

Introduction

The economy of the United States has been on the rise from 2018 to 2019 at a stable rate, with the subsequent strengthening witnessed in the labor markets (Federal Reserve, 2019). The Federal Open Market Committee (FOMC) aims at reducing inflation by two percent through combined efforts for policy accommodation. For instance, FOMC doubled the federal funds' range in the next half of 2018, so that the new levels are between 2-1/4 and 2-1/2 percent. With regards to the lessened global financial and economic conditions, and declined inflation pressure in late 2018, FOMC did indicate to identify and evaluate the future changes to the rate of federal funds to support its purpose of realizing price stability and employment opportunities.

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Financial and Economic Conditions

The strength of the labor market has been on the upward trend from the middle of 2018. Thus, the growth of payroll employment opportunity has remained stable on the monthly average of 224, 000 from June 2018, with the growth of wages recorded across the economy. However, the rate of unemployment has remained relatively stable, that is, below four percent. Moreover, human resource participation in the labor force has improved despite the negative influence of the old age individuals in the economy of the United States.

Statistics based on the personal consumption expenditure determined the rate of price inflation to have moved to 1.7 percent at the end of 2018, the move being restrained by the energy prices of the consumers (Federal Reserve, 2019). Initially, the core inflation has been used in the determination of customer price inflation due to its exclusion of energy and food items consumed. In the past times, core inflation best indicated the extent of inflation as expected in future than other techniques which included the energy and food items, for instance, the headline measure. The measurement of longtime inflation by survey measures have been determined to be relatively solid. However, the measurement of inflation compensation by the use of market measures came down in the second half of 2018.

Potential techniques reveal the real Gross Domestic Product (GDP) to improve at a stable rate, during the next half of 2018. Generally, in the year 2018, the GDP improved relatively less than three percent, which is considered a significant improvement when compared to the previous years. Expenditure by the consumers grew at a rapid rate in the next half of the year 2018. The strengthening of consumer spending can be attributed to the improvement of household wealth, robust employment opportunities, and increased disposable income as facilitated by the Job Act and Tax Cuts, however, towards the end of the same year, the customer spending declined (Federal Reserve, 2019). The year 2018 also experienced increased investment in various business ventures across the United States. However, the growth of business investment declined late in the year due to higher costs of running a business and increased interest rates of mortgage. Indicators of business and consumer sentiments are currently at manageable levels with the softening of various factors. That is a reflection of the volatility of financial markets, with the increase in global outlook perspectives.

The financial conditions of the United States for households and domestic businesses are not proving supportive enough to favor the growth of the US economy as from July 2018. The investors declined increased participation in business due to increased risks with increased withdrawals in financial risk recorded in the later parts of the year. Since July 2018, there have been increased concerns by the investors in the domestic business sector regarding the risks of international trade; for instance, the tension experienced between China and the United States. Therefore, there was a decline in risky asset prices and treasury yields from October to December. The substantial decline occurred during increased vitality in the US economy, before being retracted in early 2019. Since July 2018, there were several balances expected in the subsequent years. First, the rates of federal funds were expected to downshift, mortgage rates and Treasury yields in the long term considered to be relatively lower, and the United States equity process expected a relative increase. The year 2019 witnesses the rebound of corporate bond issuance, although, it slowed down in late 2018. Moreover, there is an improvement in the consumer credit and other finances for the consumers to help them in household expenses, despite a notable rise in the interest rates. Also, the economy of the United States generally improved as the value of US currency became relatively strong when compared to the currencies of other partners engaged in trade (Canova, 2004).

The financial system of the United States remains is still resilient as from the decade after the worst financial crisis in the recent past. The increased concerns about asset valuation lessened when compared to July 2018 (Hetzel, 2018). For instance, the ease was experienced with regards to a corporate bond, loan markets leverage, and equity. There is increased control over liquidity and capital ratios of big banks in the United States and among other significant financial institutions. The risks involved during funding are low as compared to what was experienced before the financial crisis experienced domestically. There is a drastic rise by household borrowers based on the income by either household, with the prime borrowers being the key players. Business organizations are recording an increase in debt whereas the standards of credit are declining after the first half of the year 2018. The credit standards are most applicable in the loan market segments comprised of unrated or lower-rated business organizations.

The Federal Reserve Monetary Policy

In the identification and determination of the standing of monetary policy, the legislators must consider vast information about the present and possible expected conditions of the economy. These policymakers work in consultation with a variety of existing rules without actively engaging in the prescriptions for policy formulation. The approach undertaken by FOMC to conduct a structured monetary policy makes it possible for enough measures which address the risks and other complex events in the current economy, while making sure the policy is transparent and predictable (Hetzel, 2018). Transparency is significant for large banks as that provides a significant accountability basis. Moreover, the effectiveness of the monetary policy is improved, while the central bank is supported to establish financial stability in the economy. Therefore, the Federal Reserve employs several communication techniques which will make known the decisions and approach of policymaking.

The Interest Rate Policy. While the economy and labor market strengthened at a fixed rate, the FOMC's target range increased gradually for the federal capital past the first half of the year 2018. For instance, the federal funds rate were raised by the committee during September and December, making its current range become 2-1/2 percent (Federal Reserve, 2019). December experienced concerns with regards to international growth, financial markets vitality, and trade tensions. These concerns prompted FOMC to increase control of financial and economic international developments. Moreover, there was an assessment of the implications in the economic perspective. In January 2019, the committee indicated their commitment to continue with sustained improvement of the economic activities, reduction in inflation, and maintaining severe conditions of the labor market.

The Balance Sheet Policy. There is a continued increase in the implementation of the balance sheet program as from October 2017. For instance, the committee its agency and Treasury holdings in a predictable and slow approach, through reinvestment of initial payments obtained from those securities. Thus, the total assets of the Federal Reserve in the close of the period was recorded at near four trillion dollars, which is a decline of 260 billion dollars (Federal Reserve, 2019). FOMC released information about Balance Sheet Normalization and Policy Implementation which provided further information about the monetary policy. For instance, the committee aims at continued monetary policy implementation with the presence of sufficient reserve supplies such that direct control of reserves is not needed. Moreover, FOMC identified its preparation to amend any of the information required for the completion of balance sheet normalization with regards to the financial and economic developments. After the financial crisis determination of Federal Reserve balance sheet was based on the asset purchase decisions that influence economic growth. Therefore, the increase in the total assets is facilitated by high reserve balances of financial institutions where money is deposited.

References

Canova, F. (2004). Monetary Policy and the Evolution of the US economy. SSRN Electronic Journal. doi: 10.2139/ssrn.1001863

Federal Reserve. (2019). The Fed - Monetary Policy: Monetary Policy Report. Retrieved from https://www.federalreserve.gov/monetarypolicy/2019-02-mpr-summary.htm

Hetzel, R. (2018). The Evolution of U.S. Monetary Policy. Federal Reserve Bank Of Richmond Working Papers, 18(01), 1-35. doi: 10.21144/wp18-01