Simulation of a Federal Reserve

Federal Open Market Committee (FOMC) is the policymaking arm of the Federal government. It was formed by the Banking Act of 1933. The committee meets eight times a year to discuss the monetary policy of the country. As the advisory team, we have done a research and come up with recommendations that will ensure the decision made by the committee is in regard to the market expectations.

We believe that federal funds rate is vital to the economic growth of the country. Its rise or fall has a significant effect on the rate of growth. This is because when the rate is lowered, it becomes possible for most people to access loans through financial institution as interest rate goes down. In case the federal funds rate goes up then most investors are faced with the high burden of paying the high interest charged on loans and mortgage. Financial crisis results to both high interest and inflation rate therefore prompting the FOMC to take incentives aimed at reducing the burden on its citizens and working on a way to prevent economic slump.

The following economic indicators are the ones we have used in order to determine whether to lower, raise or maintain the current federal funds rate:

  • – Gross domestic product which currently stands at 7%
  • – Unemployment rate which stands between 5-6 %
  • – Consumer Price Index which stands at 2%
  • – Stock price

A leading indicator changes before the economy does so. Examples are the stock market returns, index of consumer expectations, money supply and building permits. Over the last few months, returns on stock market have increased; this indicates a favorable growth of the economy as a whole in the near future. Unemployment rate has been stagnant for the last few years standing between 5-6%. This stagnant rate signifies a slow growth in the labor industry. This puts a lot of burden on the working class and the government as it has the mandate of taking care of the unemployed.

The GDP rate reflects how good a country is doing economically. The country’s GDP has not shown major progress in the recent months, this means a lot need to be done in monitoring the amount of money released to the economy. On the other hand, the inflation rate has continued to go down as the economy recovers from the economic slump we have experienced for the last two years.

Going by the above statistics, the committee should consider lowering the federal funds rate to make it possible for more people to borrow money from the government for economic growth. However, care should be taken to ensure that the rate does not go so low resulting to inflation. In addition, the interest given by banks should be regulated to make it rather hard for an individual to access so many loans.

The New York trading desk should enhance high employment and price stability. This will result to the falling of the federal funds rate below the range it currently stands. Also investors should consider buying treasury securities which have a longer maturity. This will facilitate downward pressure on long-term interest rates. Consequently the federal funds rate will also go down. To lower inflation, the banks should slightly increase their lending rate and put strategies aimed at lowering the level of borrowing considerably.

The concept of money multiplier requires financial institutions especially banks to maintain an interest rate that does not result to high borrowing which is likely to cause inflation. On the other hand, consumers should low their disposable income in order to push the prices of goods to minimum. Instead they should try and save a big fraction of their income.