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(solution) Assume your group represents the Federal Open Market Committee


Assume your group represents the Federal Open Market Committee (FOMC) and is making a case to the Senate Banking Committee regarding the future direction of monetary policy.


Review the statistics attached. Do not merely cite numbers and values, but identify trends, relationships between the variables, and the significance of each factor in enabling or hindering the Fed from meeting its twin policy goals of promoting full employment and minimizing inflation. 


Federal Open Market Committee Research GDP and the rate of GDP growth

 

o Q3-2015: 2.0% from previous (Q2-2015:3.9) Advanced an annualized 2% in 3 month in 2015, which was above market

 

expectations of a 1.9 % growth. Reflects positive contributions from personal

 

consumption, non-residential fixed investment, state and local gov spending,

 

residential fixed investment, and exports that were partly offset by neg

 

contribution from private inventory investment. History: average 3.25% from 1947 to 2105 (all time high of 16.90 in 1950 and a

 

low -10 in 1958). Retrieved from http://www.tradingeconomics.com/united-states/gdpgrowth

 

o 2000 History-highest GDP 2000-Q2: 7.8, lowest GDP 2008-Q4: -8.4

 

o Current GDP: $17.42 trillion Current US population total: 318.9 million Retrieved from http://data.worldbank.org/country/united-states

 

o Projected rate of GDP growth 2015: 2.15 2016: 2.4 2017: 2.2 2018: 2.0

 

o A rise in GDP will increase employment rate. GDP is a key indicator of economic activity.

 

Measures of inflation and consumer prices

 

o Current US inflation rate: (up and including Nov 2015) 0.5%

 

o Past inflation rates (Graph and inflation rate retrieved from

 

http://www.usinflationcalculator.com/inflation/current-inflation-rates/) o Future Inflation rate graph (retrieved from

 

http://www.statista.com/statistics/244983/projected-inflation-rate-in-the-unitedstates/) Consumer prices Measured by the CPI (consumer price index) Produces monthly data on changes in the prices paid by urban consumers for a

 

representative basket of goods and services (retrieved from

 

http://www.bls.gov/cpi/) http://www.bls.gov/news.release/pdf/cpi.pdf *** use for more information

 

about CPI and what affects CPI

 

Level of money supply growth

 

o US experienced an increase of Money Supply M2 from 12330 USD billion 12/14 to

 

12288.10 USD billion in 11/14. (Retrieved from

 

o http://www.tradingeconomics.com/united-states/money-supply-m2) o Reported by the Federal Reserve

 

Discount rate/ Federal funds rate

 

o Current discount rate (as of 10/2015): 0.75% per Annum

 

o Projected Rate increases or decreases Affected by Treasury Bond Market Bond traders are paid to anticipate economic events (retrieved from

 

http://www.money-rates.com/fed.htm) Treasury is the best reflection of interest rate trends due to prices not

 

being affected by ?issuer-specific events the way corporate bonds might

 

be? (retrieved from above link). Changes daily and the focus should be on month to month changes Affected by Market for Bank Rates Understanding certificate of deposit, money market account and saving

 

rates will tell you quickly if banks will start to move rates higher. (info

 

from above link).

 

o Current Federal Funds rate (as of 1/7/2016): 0.36% Board of Governors of the Federal Reserve System is responsible for the

 

discount rate and reserve requirements. Federal Open Market Committee is

 

responsible for open market operations. Federal Reserve can influence the

 

demand, supply, and balances of depository institutions held at Federal Reserve

 

Banks. This is how federal funds rate are altered, which is the interest rate at

 

which the depository institutions lend balances to other depository institutions. Change in these fund rates can trigger a chain of reactions that included: Affecting other short-term interest rates Foreign exchange rates Long-term interest rates The amount of money and credit Economic variables including o Employment

 

o Output

 

o Prices of goods and services

 

Measures of employment and the unemployment rate

 

o Employment Rate Current: rise (as of dec 2015) of nonfarm payroll totaling to 292,000 employed Retrieved from http://www.bls.gov/news.release/empsit.nr0.htm Projected (retrieved from http://www.bls.gov/news.release/pdf/ecopro.pdf) 2014-2024 growth due to healthcare occupation and increase in a

 

proportion of the population becoming in the older age groups

 

o This will cause a decrease in labor force participation rate and

 

labor force to slow Slowdown will cause a 2.2% annual rise over the decade

 

in GDP Economic Growth projected to generate 9.8 million jobs

 

(6.5% increase between 2014-2024)

 

o Unemployment rate Current: 5.0% (retrieved from http://data.bls.gov/timeseries/LNS14000000) Down consistently for 3 months by 0.6% (retrieved from

 

http://www.bls.gov/news.release/empsit.nr0.htm) Projected: graph retrieved from

 

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150917.pdf Investment spending by the private sector

 

o Variables showing high level of private sector spending increase the level of employment

 

and reduces inflation r/t high investing causing new jobs

 

o economy driven by demand every dollar US government adds to demand (or subtracts it) will be multiplied

 

by changes in private spending increased government spending can create a phenomenon known as ?crowding

 

out? causing the private sector to contract spending. Crowding out definition

 

(http://economictimes.indiatimes.com/definition/crowding-out-effect)

 

o A situation when increased interest rates lead to a reduction in

 

private investment spending such that it dampens the initial

 

increase of total investment spending Cuts in spending by the government in turn can make economic resources

 

available for the private sector to use more productively

 

o 1.4 % growth since 2004, and 0.5% average growth since 2010, decline in 2015 by 0.4%

 

(retrieved from http://www.valuewalk.com/2015/03/u-s-productivity-in-the-postwar-era-and-investment-spending/)

 

U.S. trade balance

 

o Trade balance is a deficit, which is a major concern since this hinders productivity r/t the

 

US continues debts

 

o Affects employment and inflation and cause it to be high r/t the need to increase funds

 

to pay debts.

 

o Current (as of 10/15): $43.9 billion (retrieved from http://blog.bea.gov/category/tradedeficit/ )

 

o Future (retrieved from http://www.tradingeconomics.com/united-states/balance-oftrade/forecast) Value of the dollar on foreign currency markets

 

o Value of the dollar greatly affects foreign currency markets

 

o Determines exchange rates, influences market and inflation rates Increases causes lesser ability for goods to be purchased

 

o As supply of USD increases, the price of the USD falls causing depreciation

 

o Current values USD-EUR(euro): 1 USD = 0.91 euro USD-CAD (Canadian): 1 USD = 1.46 CAD

 

o Projected: use http://longforecast.com/fx/euro-exchange-rate-forecast-for-2018-2019and-2020.html

 

Housing starts

 

o Shows a fair increase in the near future as employment continues to rise Due to the rise people will feel as they are able to support themselves in a better

 

way than the past o

 

o Current: (as of 11/15) increased 10.5%-annual rate of 1173 thousand (retrieved from

 

http://www.tradingeconomics.com/united-states/housing-starts)

 

Projected (found from above link) Retail sales

 

o Affects GDP Important fed is careful in their sales to keep the future positive

 

o Current: 2.2% growth (12/15) retrieved from http://www.multpl.com/us-retail-salesgrowth

 

o Future: retrieved from http://digiday.com/brands/retail-charts/

 

o Consumer Confidence

 

o Measures the degree of optimism of the customer towards specific companies

 

o Current: 93.3 (as of 12/15) retrieved from http://www.tradingeconomics.com/unitedstates/consumer-confidence/forecast

 

o Future: (retrieved from above link) S&P 500 Stock Index

 

o AKA the standard poor index-variables created by the FED can cause inflation which is

 

shown to greatly affect employment rates

 

o Current: (as of 1/16) -8.00%, value 1,880.33

 

o Projected: (monthly projections for 16-17) retrieved from

 

http://longforecast.com/index-sp500/s-p-500-forecast-for-2015-2016-and-2017.html

 


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