Monetary policy is administered exclusively by the Federal Reserve. Quite simply it is the Federal Reserve System's use of the money supply to...
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Monetary policy is administered exclusively by the Federal Reserve.

Quite simply it is the Federal Reserve

System's use of the money supply to stabilize the business cycle. Interest rate is the price of money and the Fed has control over interest rates.  As the nation's central bank, the Federal Reserve System determines the total amount of money circulating around the economy.  The history of monetary policy from the Fed shows it is always adjusting to economic conditions.

Beginning in the middle of 1999 and ending in the spring of 2000, the Federal Reserve Board raised the Federal Funds interest rate and its Discount Rate in increments which totaled 1.75 percentage points in order to slow the economy (engineer a "soft landing"). The Fed was concerned that key economic indicators were showing that this action was needed in order to prevent inflation from reaching unacceptable limits. These increases brought those interest rates up to 6.50 and 6.25 percent respectively.


Up until November 2000, the Fed was still biased toward inflation concerns. Then in December 2000, the Fed was suddenly more concerned with an unexpectedly rapid slowdown in the economy and, between January and December of 2001, lowered interest rates eleven times for a total of 4.75 percentage points down to 1.75 for the Federal Funds and 1.50 for the Discount Rate in order to stimulate aggregate demand. Subsequently, the Fed lowered the Federal Funds rate down to 1.00 % and held that level until mid-2004.

The concern of the Fed changed again when it raised the Federal Funds rate 17 times over a 20 month period during 2005-2006 to 5.25 percent, and then reversed itself in early 2009 and gradually lowered it to almost zero. Or course, since then rates have gradually increased.

Fast forward to today when we are experiencing profound economic expansion.. Economists debate whether we heading for another crash landing of the economy, or if the Fed has it right about prospects of inflation versus a contraction in growth?


Assignment


Give us an example where you have seen a rise or fall in interest rates influence a decision. This can be a business decision or a personal decision. If you do not have a personal story, you are welcome to research and find one.


Lets see how the changes in rates can affect our economy in the multitude of ways you and your classmates have observed.  So the components of your post require that you tell us:


1. The approximate date of the decision, what the change in interest rates were and what the decision was.


2. What action, if any, the Fed took that changed the interest rate and what the concerns of the Fed were at the time.


3. In hindsight whether the change in interest rates was predictable. Why do you have this opinion?


4. What other elements went into the decision besides the interest rate. In other words, what the change in interest rates the sole reason for the decision, a tipping point or merely one of many considerations.

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