Federal Open Market Committe (FOMC), Inflation and Stable Economic Growth

Stable Interest Rate and Stable Economic Growth

In December 2006 , it was reported that the Federal Reserve would keep the interest rates unchanged for a long while , perhaps through most of 2007 . This is because the economy is showing mixed results at present Inflation is high , and so the Federal Reserve could have reduced interest rates to defeat the problem . However , decreased economic activity in the housing market has slowed down the rate of economic growth (Idaszak Goldstein , 2006 . A slowing of the rate of economic growth , no doubt , calls for raising

interest rates . Yet the Federal Reserve cannot raise interest rates while the economy faces high inflation

The decisions made by the Federal Reserve to change or keep steady the rates of interest do in fact influence economic activity . What is more , economic activity has a direct influence on interest rates , seeing that it is economic activity in the nation that leads the decisions on interest rates . Investors foresee changes in economic activity and rates by analysis . The predictions they make lead to important investment decisions impacting the entire economy . Thus , a normal yield curve is the result of an expectation of stable economic growth and rates (See Appendix . On the other hand , a steep yield curve is made whenever investors have foreseen extraordinary growth . At times when long-term yields are the same as short-term rates , investors see a flat or humped curve . This is when an economic slowdown and low interest rates follow a period of flattening yields ( The Living Yield Curve . The Federal Reserve is , of course , absolutely connected to the expectations of the investors as well as all kinds of yield curves

At present , the Federal Open Market Committee , which formulates the monetary policy , has chosen to maintain the federal funds rate at 5-1 /4 percent . According to Chairman Ben S . Bernanke (2007 , this monetary policy would most probably foster stable economic growth , and

Stable Interest Rate and Stable Economic Growth 2

eventually slow down inflation . However , if this monetary policy fails to slow down core inflation , the Federal Open Market Committee would have to specifically address the risk of inflation through a change in policy

The Federal Reserve cannot simply increase the funds rate to reduce the core inflation rate at this time , seeing that the economy continues to show mixed results . Chairman Bernanke refers to this growth as uneven ' Although real economic activity in the country expanded at a good pace in the year 2006 , the housing market continued to cool substantially . Now if the Federal Reserve were to increase interest rates , the housing market would be expected to slow down in terms of economic activity even further . This is the principal reason why the Federal Reserve would not increase interest rates to reduce the core inflation rate

Apparently , only the housing market is making the economic growth uneven today . The core inflation rate is another problem facing the economy , perhaps caused by the remainder of the economy still growing rapidly . Because the economic...