Effects from the Last Federal Reserve Meeting

by Emily on February 6, 2012

Recently the Fed had a meeting that many are saying will have long lasting effects on how the central bank operates. The Fed took two steps in last weeks meeting. The first was publishing detailed interest rate projections of each of the 17 officials who participate in the policy meetings. The publication did not identify the officials by name. The next step was laying out its goals for inflation and unemployment in explicit detail.

The fist step, the projections of where the officials believe interest rates should go. This step shows that the chairman, Ben Bernake operates the Fed through consensus, he looks to a committee to determine policies for our nations economy. It has been said that previous chairman such as Alan Greenspan, Paul Volcker, and Arthur Burns make decisions as individuals rather than through a committee. Ben Bernake’s term as chairman ends in 2014, and it is projected that he will not be returning for another term at the end of 2014.  There are 12 regional Fed bank presidents, 5 of which get to vote at the meetings. There are 7 other people in the meetings who are in on the policy discussions, but do not get to vote.

The group of 17 voted to have short-term interest rates set at 0.75% at the end of 2014. The 10 voting members suggested that the Fed expects the interest rate to be near zero at least through late 2014.  Ben Bernake said in a news conference last week that the views of the formal voters would always trump the larger group of 17. The Fed votes are required by law.

The second step, explicitly detailing goals for inflation and employment is a long term goal of the Fed. Many have criticized the Fed because of their actions during the financial crisis. The central bank has made a distinct point of saying that the inflation rate is going be kept around 2%. Bernake said that if inflation is above the goal and unemployment is also high, he may choose to take a little extra time trying to bring down the inflation rate with restrictive monetary policy. This means that interest rates will not change for the next three years. This is a record low rate. Bernake also said, that unless there is a substantial strengthening of the economy in the near term, it’s a pretty good guess that the fed will be keeping rates low for some time now.  The central banks has kept this rate at a record low near zero for three years. Bernake even suggested that the Fed has not ruled out more aggressive steps to boost the economy such as a third round of bond purchases.

The Fed forecasts that the economy will grow between 2.2 percent and 2.7 percent in 2012, according to their updated economic forecasts. This prediction is down from the forecast in November of 2011 of 2.5 percent and 2.9 percent. The Fed expects unemployment to fall as low as 8.2 percent, which is better than the prediction from November 2011 of 8.5 percent. The unemployment rate fell to 8.3 percent last month, after the sixth consecutive month of increased hiring.  Time will only tell how long Bernake lasts as the chairman of the Fed, he said that he will not resign if one of his critics wins the upcoming election.  We can only hope that the Fed’s policies will improve the economy and lower unemployment rates.

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Emily

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