Tuesday, May 10, 2005

The Fed and Monetary Policy

The Fed Uses This Letterhead Posted by Hello

Most people have never seen a Federal Reserve Press Release. Instead, they rely on newspapers, TV, and the Internet to keep them informed and to interpret the Fed's monetary policy actions. Because of the Internet, you can do it yourself.

Copied and pasted below is the latest press release, indicating a tightening of monetary policy by the Fed. I've read that this is the eighth time in a row that the Fed has announced an increase in the federal funds rate target. The federal funds rate is the interest rate than banks charge on funds they loan to each other. You might think that the interest rate on savings would increase in lockstep with the federal funds rate, but I haven't seen any upward movement in the interest rate I earn on my savings account. Savings rates usually respond to Fed actions, but with a lag.

You'll notice that the vote to raise the federal funds rate target was unanimous. That's typically the case since the Fed wouldn't want to appear divided. It might upset the financial markets if they were. The related decision to raise the discount rate, which is the interest rate on funds banks borrow from the Fed, sends a uniform message: "We're tightening!"

Release Date: May 3, 2005
For immediate release
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.
2005 Monetary policy



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