Analysis Of The Federal Reserve's Monetary Policy

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The Federal Reserve manages monetary policy to achieve the following goals: price stability, high employment, economic growth, and financial market stability. To achieve these goals the Fed will decrease or increase money supply through open market operations as well as make changes to the required reserve ratio, discount rate, and interest rate.

At the beginning of 1991 unemployment was an issue that needed addressing.

To address this issue the Fed implemented a monetary policy which reduced the federal funds rate.

The 1990 Gulf War led the U.S. to a recession lasting from July 1990 to March 1991. During this recession, the unemployment rate rose to 6.8% eventually peaking at 7.8% in 1992. “The Fed reacted by steadily reducing the federal
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Inflation did not rise, and the period of economic growth during the 1990s continued. Then in 1999 and 2000, the Fed was concerned that inflation seemed to be creeping up so it raised the federal funds interest rate from 4.6% in December 1998 to 6.5% in June 2000” (Monetary Policy and Economic Outcomes, 2014).

“The U.S. economy had been growing at a rapidly increasing clip during 1993. As 1994 began, several key indicators of the economy were entering the danger area. For example, capacity utilization was reaching a level that could cause an increase in the inflation rate by the later part of 1994 if high economic growth rates continued. Rather than wait for the anticipated inflation to materialize, the Fed initiated a restrictive monetary policy to slow the growth rate of GDP” (Kaplan, 2002).

To execute a restrictive monetary policy the Fed used open market operations to sell bonds to banks resulting in banks having less money to loan out. This caused the money supply to reduce slowing the growth of
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“By the summer of 1995, unemployment rates were on the rise (from 5.4% to 5.8%) and GDP growth had slowed to a crawl, growing at only a 1.3% real annual rate in the second quarter (April-June) of 1995. This was the slowest rate of GDP growth seen in 4 years. To some, recession was looming. To deal with the slowing economic growth rate, the Fed cut interest rates in May 1995” (Kaplan, 2002).

“The 10-year economic expansion of the 1990s came to a close in March 2001 and was followed by a short, shallow recession ending in November 2001. In response to the bursting of the 1990s stock market bubble in the early years of the decade, the Fed lowered interest rates rapidly” (History of the Federal Reserve, n.d.).

From 1991 to 2001 the economy continued to grow. The monetary policies placed by the Fed during this time frame achieved its goals especially high employment. By lowering interest rates businesses can afford to borrow money. This allows businesses the opportunity to expand creating more jobs. Individuals are also affected by lower interest rates. Lower rates decreases the cost of borrowing allowing people to be able to spend more money resulting in GDP

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