HW4B: Suggested Answers in
1) On October 29, 2014, the members of the Federal Open Market Committee (FOMC)
of the Federal Reserve Board voted to maintain its federal fund target within the same
range of 0.25% basis points and 0% percent, as it was set by the FOMC back in August
2011. But in 2011, the economy was in severe recession and the purpose was to boost the
economy by increasing liquidity in the banking system at this low rate when the inflation
was also very low. The specific action of the Fed trade was to purchase treasury securities
every day to increase the money supply and thus keep the interest rate (the federal fund
rate) low to stimulate the economy.
But in October 2014, the economy has shown to its near full recovery and stock market
and financial institutions are performing very well since 2011. On October 29, 2014, the
FOMC also decided to end the asset purchase plans under Quantitative Easing (QE III)
under which the Fed had been buying mortgage backed securities and LT Treasury Bonds
since the recovery started in 2011. Upon this decision to end the QE III of asset purchase
and keeping the same federal fund rate target, the Dow Jones Industrial Average Price
gone down significantly and did not fully recover by the end of the trading day.
What are the macroeconomic trends that did prompt the FOMC to end the
QE III but to keep the federal fund rate still at its historic low? You need to give reasons
for both of these policy measures.
For more information, please visit the press release of FRB in the url link here.
Also, read some newswire analysis here on cnn portal on the same day.
The key factors that prompted the Fed are mainly the signs of economic recovery
reflected in sustained RGDP growth rate for the last 3 years, continuous decline of
unemployment rate reaching to almost at NAIRU level, sustained rise in stock prices, low
inflation and interest rates, increasing consumer confidence, recovery of housing market,
and other related economic indicators. The policy makers at the Fed felt that at this point
of state of the economy close to
its full employment, continuation of QE III as the