Fed Policy in Year 2016

Editor’s Note, 9/19/2016: There is now “talk” that perhaps the Federal Reserve Bank (Fed) will raise the “fed funds rate” in December 2016. Here’s a discussion of possible effects of such a rate hike: CNBC on Fed Rate Hike
Should the Fed respond to International economic conditions when contemplating its policy moves? This is a dilemma for its FOMC  committee to ponder. Here’s the “mandate” of the Fed:

“The Federal Reserve System, often referred to as the Federal Reserve or simply “the Fed,” is the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Federal Reserve’s responsibilities fall into four general areas.

  • Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
  • Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
  • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
  • Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.”

Here’s a link to the website: http://www.federalreserve.gov/faqs/about_12594.htm

According to the Federal Reserve Act, here’s the monetary policy objectives:

Section 2A. Monetary policy objectives

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]  Website link: http://www.federalreserve.gov/aboutthefed/section2a.htm

International monetary “agencies” such as the International Monetary Fund (IMF) have suggested that the Federal Reserve be cautious in its rate hiking policy decisions. Here are some background articles on this subject:

Fortune Magazine: http://fortune.com/2015/06/04/imf-interest-rates/

A quote from The Straits Times: “In a report on global economic issues prepared for the Nov 15-16 Group of 20 summit in Antalya, Turkey, the IMF singled out the prospect of higher US rates as a particular challenge to the slow-growing world economy.”  Website: http://www.straitstimes.com/business/economy/imf-urges-fed-to-delay-rate-hike-until-inflation-evident


Some do use the argument that the purpose of the Federal Reserve Bank is intended to look “internally” at the U.S. economy and make any adjustments accordingly. In other words, keep unemployment down to a specific per cent, keep interest rates at an optimum level, and keep prices stable (monitor inflation). Others, of course, want the elimination of the Fed totally. We, the people, however, do live in a world today that is so interconnected that a “sneeze” in one country can “infect” the economy of another country!

My savings are getting “killed” by the low interest rate policy we have been experiencing. There are thousands of other’s savings in the same boat as I. For me personally, I would love the Fed to raise savings interest rates; interestingly, (pun intended), savings rates are controlled by the banks not the Fed. They are indirectly affected by the Fed Funds Rate, (as I currently understand the complicated nature of interest rate manipulation).

So, getting back to my question at the beginning of this posting, “Should the Fed respond to International economic conditions when contemplating its policy moves?”  I hate to say it but it’s not the Fed’s job according to its monetary policy mandates. I tend to take things literally, so my interpretation of the Fed’s responsibilites would probably cause unintended consequences for someone. But then again… would I be any different than anyone who has messed around with our economy, economic policies, enacted poorly thought-out or “special-interest’ intended laws?

I could say “we’re only human” but look how far that reasoning has gotten us!!!


4 thoughts on “Fed Policy in Year 2016

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