Fed Watch Analyze: Money And Banking

Name: Institution: Course: Date: Fed Watch Analysis According to a public release by the Federal Open Market Committee on March 21, 2018, the U.S. GDP is expected to rise to 2.7% in 2018, 2.4% in 2019, and 2.0% in 2020. On the other hand, the rate of unemployment will reduce to 3.8% in 2018, 3.6% in 2019, and 3.6% in 2020. Also, the report shows that inflation will be 1.9% in 2018, 2.0% in 2019, and 2.1% in 2020 ("The Fed - FOMC Projections Materials, March 21, 2018" n.p.). However, the Fed prefers the core inflation rate in setting the monetary policy. The core inflation rate will be 1.9% in 2018, 2.1% in 2019, and 2.1% in 2020, and lies close to the 2.0% target inflation rate of the Fed. As a result, there is need for the Fed to hike the rates to a more reliable rate. During the FOMC policy announcement, an increase in economic activities and general economic development was reported. The Fed Chairman Jerome Powell said he is yet to consider changing the mechanisms of fed funds rate control despite the rise in rates and the good economic performance (“Federal Reserve Issues FOMC Statement" n.p.) Interest rates are the most important economic indicators. The Fed funds rate is raised to slow down economic growth and prevent inflation. The Fed raises interest rates as well as sell its treasuries and other bonds as part of its role in implementing a restrictive monetary policy that reduces the money supply to restrict liquidity and hence stop inflation. Regarding Fed's predictions and resolutions, the agency aims at maintaining inflation close to its 2% target and at the same time maintain a low rate of unemployment ("Implementation Note Issued March 21, 2018” n.p.). Although the Phillips curve indicates that decreasing unemployment act as a push for inflation as the Fed officials believe, it has not been the case throughout the recovery. In this case, the unemployment rate is a lagging indicator because it cannot predict future economic fluctuations (Cox, n.p). The federal funds rate is the interest rate at which banks lend to each other in relation to Federal Reserves. As a requirement of the central bank, the banks ensure maintenance of the Federal Reserve requirement for each night (Igan et al., 171). It is a way of ensuring cash availability in each operational day by preventing banks from lending out all the money they get (Kurov and Raluca 128). The fed funds rate is used by the Federal Reserve in regulating United States’ economic growth. It is vital in the monetary sectors because it influences other short-term interest rates in banks including bank loans, savings, mortgages, and credit cards (Cox, n.p.). The FOMC adopts market-related functionalities to work towards a certain set target required as the fed funds rate. For instance, it may choose to purchase securities from its constituent bank branches when in pursuit of reducing the fed funds rate. The banks end up with more reserves than they need and thus necessitating an increase in their...