Copyright © Council for Economic Education. Reproduction for Educational Use is Granted The Federal Reserve and Monetary Policy A Case Study May 3, 2005.

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Presentation transcript:

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted The Federal Reserve and Monetary Policy A Case Study May 3, 2005 Stephen Buckles Vanderbilt University

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted

May 3rd FOMC Announcement The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3 percent.

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted The reason The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Recent data suggest that the solid pace of spending growth has slowed somewhat, partly in response to the earlier increases in energy prices. Labor market conditions, however, apparently continue to improve gradually. Pressures on inflation have picked up in recent months and pricing power is more evident. Longer-term inflation expectations remain well contained.

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted The future The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted The vote Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

Copyright © Council for Economic Education. Reproduction for Educational Use is Granted A new discount rate In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.