Thinking Aloud

U.S. Federal Reserve: birds of a feather

The Federal Reserve is the United States central bank. It has four fields of operations:

• "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." (The Fed) 

In Jackson Hole, Wyoming, Fed Chair Janet Yellen delivered a speech regarding Federal Reserve's Monetary Policy. In the speech she refers to the fact that the federal funds rate has strengthened in the recent months (1). Why does it matter if the federal funds rate is increased or decreased? The simple explanation is the Fed is trying to maintain a healthy economy. If the economy is stagnant the Fed might opt to lower interest rates in facilitating in making money more available to firms, home buyers, businesses and consumers. If the economy is augmenting then the Fed will elect to raise interest rates to slow the economy's progression. So the question is what does Janet Yellen's statement emphasize? The implications of her statement highlights whether the Fed will have the flexibility in the future in regards to their policy management. "While the published pace of economic growth has been pretty anemic so far this year, the labor market has remained healthy and job creation has averaged a respectable 190,000 in the past three months" (1). The Fed expects a moderate rise in the future ensure a strong labor market and a steady rise in inflation. This economic outlook means the Fed has a case for a rise in interest rates. The Fed knows that every economic cycle there are down turns, but a continuos nuetral rate of interest will render the Feds policy flexibility useless. The economy following the financial crisis has never fully recovered growing in a positive direction, sabotaging investment. So, it forces government investment. But the cautionary tale is the Fed must go about policy flexibility lightly so it can have options when it operates and keeping its mandates.

Article: U.S. Federal Reserve: birds of a feather_Thinking Aloud