The Federal Reserve (Fed) is a terrific source of economic data, forecasts, and perspectives on current economic conditions and policy making. The Fed has both regulatory and monetary responsibilities and its reports to Congress and public statements shape policy-making efforts and expectations related to the economy. Understanding these responsibilities and the Fed’s data sources and expectations facilitates long-term planning and decision-making. The following discusses these roles, sources of information, and perspectives on the economy.
The seven members of the Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/) are appointed by the President and approved by Congress. They are responsible for formulating policy and implementing these policies through the Federal Reserve Banks. See the following link for information related to frequently asked questions about the Board of Governors (http://www.federalreserve.gov/faqs.htm). The publication, The Federal Reserve System, Purposes & Functions (http://www.federalreserve.gov/pf/pf.htm) includes an overview, and sections on monetary policy and the economy, implementation of monetary policies (open market operations, and changing the discount rate and reserve requirements), and international perspective, and regulatory responsibilities. It also includes a section on the role of the Fed and payment systems in the United States. The website for the Board of Governors is also a very good resource for economic research and data. See this link for details: http://www.federalreserve.gov/econresdata/default.htm. Another excellent source of historical economic data and perhaps the best single site to go to in order to start a research effort is the Federal Reserve Bank of St. Louis. The link is:
http://research.stlouisfed.org/fred2/.
The Fed’s monetary policies capture a lot of the attention the public has on the Federal Reserve and the economy. This Board of Governors’ website includes details related to this (http://www.federalreserve.gov/monetarypolicy/default.htm), and this is a very good resource for details related to this issue. Monetary policy decisions are made by the Federal Open Market Committee (FOMC). The FOMC (http://www.federalreserve.gov/monetarypolicy/fomc.htm) includes the members of the Board of Governors and five Reserve Bank presidents. The FOMC meets eight times during the year, and will meet at other times if necessary. The main policy goals of the Fed include balance economic growth, stable prices, and full employment.
The Fed uses contractionary monetary policy tools at a time when the economy is in a period of very strong economic growth and inflation expectations are very high. When this occurs, the Fed will sell US Treasury bonds as they raise their target for the Federal Funds rate, increase the discount rate, and on very rare circumstances raise reserve requirements. The impact of this policy is to reduce the money supply and raise short-term interest rates. Higher interest rates will, everything else being equal, lead to decreases in household and business spending and lower the rate of growth of the economy.
The Fed employs expansionary monetary policy tools at a time when the economy is in a recession and inflation expectations are very low. In order to do this, the Fed buys US Treasury bonds as they lower their target for the Federal Funds rate, lower the discount rate, and on very rare circumstances lower reserve requirements. This increases the money supply and lowers short-term interest rates. At the same time long-term interest rates may or may not be impacted as these rates will be more dependent on inflation expectations and expectations related to economic conditions. Lower interest rates will, unless the economy is overcome with uncertainty, lead to increases in household and business spending and increase the rate of growth of the economy. As we have seen, during the very sever recession of 2007 to 2009, the twin problems of a serious decline in asset values combined with a financial crisis and uncertainty, make expansionary monetary policies more difficult to implement. Extraordinary efforts were necessary.
The Monetary Policy Report to Congress dated July 21, 2010 details the extraordinary efforts undertaken by the Fed to stabilize the economy, and this illustrates the vast array of tools at the Fed’s disposal to deal with the economy. The Fed reported the following, “To support the economic expansion, the FOMC maintained a target range for the federal funds rate of 0 to 1/4 percent throughout the first half of 2010. To complete the purchases previously announced, over the first three months of the year, the Federal Reserve also conducted large-scale purchases of agency mortgage-backed securities and agency debt in order to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets. In light of improved functioning of financial markets, the Federal Reserve closed by the end of June all of the special liquidity facilities that it had created to support markets in late 2007 and in 2008. However, in response to renewed dollar funding pressures abroad, in May the Federal Reserve reestablished swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. The Federal Reserve continued to develop its tools for draining reserves from the banking system to support the withdrawal of policy accommodation when such action becomes appropriate. The Committee is monitoring the economic outlook and financial developments, and it will employ its policy tools as necessary to promote economic recovery and price stability.” (http://www.federalreserve.gov/monetarypolicy/mpr_20100721_part1.htm).
Two reports produced by the Federal Reserve receive a lot of attention. The Beige Book (http://www.federalreserve.gov/fomc/beigebook/2009/default.htm) reports details related to current economic conditions in the districts of each of the twelve Fed banks. As a result it offers information that is useful for those who want to understand current economic conditions. The Monetary Policy Report to Congress (http://www.federalreserve.gov/monetarypolicy/mpr_default.htm) is an excellent resource for those interested in a current overview of the Fed’s monetary policies and economic conditions. It is also one of two resources I suggest for economic forecasts produced by the Federal Reserve System. The second is the Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/). This is compiled and produced by the Federal Reserve Bank of Philadelphia and is forecast reflecting the opinions of a large group of economists.
For example, the Monetary Policy Report to Congress dated July 21, 2010 indicated the following related to the future direction of the economy, “Looking further ahead, the central tendencies of participants’ projections for real GDP growth were 3.5 to 4.2 percent in 2011 and 3.5 to 4.5 percent in 2012. Participants generally expected a rebound in spending on housing, consumer durables, and business capital equipment as household income and balance sheets strengthen, credit becomes more widely available, and the recovery is seen by households and firms as more firmly established. Nevertheless, participants cited several factors that could restrain the pace of expansion over the next two years, including a rising household saving rate as households seek to make further progress in repairing balance sheets, persistent uncertainty on the part of households and businesses about the strength of the recovery, spillovers from fiscal strains abroad to U.S. financial markets and the U.S. economy, and continued weakness in residential construction. Moreover, despite improvements in the condition of banking institutions, strains in the commercial real estate sector were seen as posing risks to the balance sheets of such institutions for some time. Terms and standards on bank loans continued to be restrictive, and participants anticipated only a gradual loosening of credit conditions for many households and smaller firms. In the absence of further shocks, participants generally expected that real GDP growth would eventually settle down at an annual rate of 2.5 to 2.8 percent, a pace that appeared to be sustainable in view of expected long-run trends in the labor force and labor productivity.
“Participants anticipated that labor market conditions would improve slowly over the next several years. The central tendency of their projections for the average unemployment rate in the fourth quarter of 2010 was 9.2 to 9.5 percent. Consistent with their expectations of a gradual economic recovery, participants generally anticipated that the unemployment rate would decline to 7.1 to 7.5 percent by the end of 2012, remaining well above their assessments of its longer-run sustainable rate. Although a few participants were concerned about a possible decrease in the sustainable level of employment resulting from ongoing structural adjustments in product and labor markets, participants’ longer-term unemployment projections had a central tendency of 5.0 to 5.3 percent, the same as in April.”
The following details are reported in the December 2010 Livingston Survey (http://www.philadelphiafed.org/research-and-data/real-time-center/livingston-survey/). The participants in the survey expect very low levels of economic growth during the second half of this year, 2.3% growth, and then a 2.4% rate of growth of real GDP in 2011. The unemployment rate is expected to remain very high (9.7% in 2010 and 9.4% in 2011). This reflects the expectation by the economists that recovery in the labor market will trail the recovery of the economy from this exceptionally bad recession. The economists expect that the inflation rate and interest rates will remain relatively low throughout 2010 and 2011. These low interest rates reflect the expectation that the economy will be relatively weak and that inflation will remain in check.
