Intermediate macro econ 13] The press release following the Federal Open Market

Question

Intermediate macro econ

13] The press release following the Federal Open Market Committee (FOMC) meeting held on December 11-12, 2012, included the following statement To support continued progress toward maximum employment and price stability the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximur and inflation of 2 percent. Explain what the FOMC hoped to accomplish with an announcement like this

Explanation / Answer

The date of the press release was in the year 2012 the year in which the economy was suffering from the recession and was going through a recovery process. Federal reserve was continuing the accommodative policy which in this case implies a monetary expansion. Super target range for the federal funds rate was set to lie between 0% to 0.25%. this was the time when the economy hit the zero lower bound which implies the market hit the zero percent interest rate level.

This was done in order to keep the economy stimulated for spending. The committee expected that the inflation would hover around its 2% target and unemployment rate would remain Above 6.5% And hence to bring the level of unemployment rate down by stimulating the economic activity the federal funds rate was required to be reduced.

In this sense the committee was expecting to continue this accommodative policy of monetary expansion to close the GDP gap which was generated due to the recession by keeping the interest rate low and expecting the investment spending consumption spending to rise.

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