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    The Economy and The Federal Reserve Bank

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    The Federal Reserve Bank publishes a report called the Beige Book eight times a year that summarizes the current economic conditions in each of the 12 bank districts.

    1. Report the recent conditions of consumer spending, labor markets, wages and prices, and industrial activity.

    2. What is the most recent monetary policy action taken by the FOMC?

    3. Based on your answer to 1 and 2, what monetary policy action do you recommend the FOMC take at its next meeting?

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    Solution Preview

    Please see response attached for proper formatting (also presented below), including the latest Monetary Policy (February 16, 2005) that is attached. I hope this helps and take care.


    Economics discussion questions

    The Federal Reserve Bank publishes a report called the Beige Book eight times a year that summarizes the current economic conditions in each of the 12 bank districts.

    Key Economic Indicators as of April 20, 2005
    Inflation CPI increased by .5% in April 2005
    Unemployment 5.1 % in May 2005
    Real GDP + 4.4% annual rate of increase 1st quarter, 2004
    Federal Reserve The Federal Reserve increased the target federal funds rate by .25% to 3%
    (Click on an indicator above to be directed to most recent case study.)
    Source: http://www.econedlink.org/lessons/index.cfm?lesson=EM220

    1. Report the recent conditions of consumer spending, labor markets, wages and prices, and industrial activity.

    Reports from the twelve Federal Reserve districts provided additional signs that the pace of economic activity increased a notch during June and the first half of July. Only the Chicago, St. Louis, and San Francisco districts characterized economic activity as sluggish while Atlanta described conditions as mixed. Reports from the remaining districts suggested somewhat stronger growth in the weeks since the last Beige Book. Consistent with the generally more positive assessments of current economic activity, several districts noted increased optimism about economic prospects in coming months.
    In particular, manufacturing activity edged higher in most districts, and Philadelphia and Richmond cited an end to the recent declines in production. The districts' reports also suggested that activity in the services and energy sectors grew somewhat faster in recent weeks. In contrast, consumer spending remained lackluster-only New York reported a noticeable improvement in retail sales. Housing sales and starts remained strong across districts, spurred by low mortgage interest rates, but commercial real estate conditions remained sluggish. Prices were generally little changed, though higher health insurance costs continued to be passed on to employees according to some districts. In agriculture, excessive rainfall delayed harvesting and damaged crops in several districts but was credited with alleviating drought conditions in other districts.

    Consumer Spending

    Consumer spending grew substantially last year. Personal consumption expenditures (PCE) advanced nearly 4 percent in real terms, about the same as the increase in 2003. Sales of new motor vehicles remained brisk, on average, at 16-3/4 million units. Excluding motor vehicles, consumer spending on most categories of durable and nondurable goods rose rapidly, as gains in real expenditures for food and clothing both exceeded 5 percent; however, spending on computing equipment increased less in 2004 than in preceding years, and consumers responded to the high cost of gasoline and heating fuel by cutting back on real spending for these items. Real outlays for services also increased rapidly last year, and medical services posted especially large gains. (3)

    Real disposable personal income (DPI) rose nearly 4 percent last year, but this figure is exaggerated by Microsoft's $32 billion special dividend payment in December (the bulk of which is estimated to have accrued to U.S. households). If this one-time event is excluded from the calculation, real DPI rose only 2-3/4 percent in 2004, well below the increase posted in 2003. Faster job growth helped to support increases in households' incomes last year in nominal terms, and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), which brought lower personal tax rates forward into 2003, led to larger refunds and smaller final payments in the spring of 2004. However, real income gains were held down, as higher oil prices siphoned off household purchasing power.(3)

    With the growth of real consumption spending outpacing that of real income through most of last year, the personal saving rate moved lower, from 1-1/2 percent, on average, in 2003 to only 1/2 percent in the third quarter of last year. (The fourth-quarter surge in income associated with the Microsoft dividend payments pushed the saving rate back up to 1-1/4 percent, but this increase will likely be reversed early this year as dividend income falls back. Because the company's share price declined in step with the dividend payouts, the dividends had no effect on shareholders' overall financial resources and so probably had little effect on consumption.) (3)

    Retail sales, however, were mixed across districts since the last Beige Book report. Sales improved noticeably in the New York District, while sales in the Atlanta, Kansas City, Minneapolis, and Philadelphia districts, sales posted slight to modest gains. In contrast, sales revenues were said to be flat in the San Francisco District, lackluster in the Chicago District, and below year-ago levels in the St. Louis District. Among categories, apparel sales were weak in the Boston, Cleveland, and Philadelphia districts, but were higher in the New York and Richmond districts. Richmond also reported stronger sales of home merchandise, hardware, and building supplies. In the Chicago and Philadelphia districts, customers were said to be buying less expensive brands of merchandise. Retailers in the Atlanta, Dallas, New York, and San Francisco districts cited heavy discounting and noted that retail prices remained competitive. Retail inventories in the Atlanta District were described as low and balanced, but in the Dallas and St. Louis districts, some retailers reported excess inventories. (1)

    In the single-family sector, housing starts amounted to 1.6 million units last year, a rate faster than the already rapid pace of 1.5 million units started in 2003. In the multifamily sector, starts totaled a solid 350,000 units last year, a figure in line with that of the preceding several years. Sales of both new and existing single-family homes hit new highs last year, and home prices moved up sharply. The repeat-transactions price index for existing homes (limited to purchase transactions only), which is published by the Office of Federal Housing Enterprise ...

    Solution Summary

    This solution explains the Federal Reserve Bank as a function of the recent conditions of consumer spending, labor markets, wages and prices, and industrial activity, as well as the most recent monetary policy action taken by the FOMC. Supplemented with a Monetary Report (2005).