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Fed's decision to raise rates in June '04

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In his semi annual testimony to the Senate banking committee last summer Alan Greenspan commented on the recent Fed funds rate hike in late June 2004: "With the growth of aggregate demand looking more sustainable and with employment expanding broadly, the considerable monetary accommodation put in place starting in 2001 is becoming increasingly unnecessary. In May, the FOMC believed that policy accommodation needed to be removed and that removal could be accomplished at a pace that is likely to be measured." Since then, the Fed has boosted its Federal Funds target from 1% to 2% and another increase to 2.255 is widely expected this month.

Why did the Fed begin to raise interest rates at a point in the economic recovery with concerns over terrorism and rising energy prices causing great uncertainty, the unemployment rate still at 5.7% and inflation outside of the energy sector still fairly low, although a bit higher than the 1.5% typical of the last few years. (The CPI advanced at an annualized rate of 2.6 % in the first half of 2004 if volatile energy costs are excluded?) Explain your answer carefully and illustrate it with an AS/AD diagram.

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The Fed's biggest responsiblity is not maintaining economic growth but to control inflation. The year before last June's rate increase saw tremendous raw material and input factor inflation. Metals, plastic resins, chemicals, oil, etc. saw rates up to 200% increase in price. The Fed could see that these increases would effect ...

Solution Summary

The Fed's biggest responsiblity is not maintaining economic growth but to control inflation.

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See Also This Related BrainMass Solution

Recent Fed Actions

Objective:
?Describe the role of the Federal Reserve in the economy and in regulation of financial services.

Task:
In this part of the project, you need to collect data about recent monetary actions. In your report, you need to:
?Determine the decision-making process and conduct of monetary policy.
?Analyze how a recommended policy action will affect the economy.
?Collect data about recent monetary actions.
?Describe the Fed's actions during the past monetary policy cycle.
?Analyze the rationale for the Fed's actions.

Deliverable and format:
Two- to four-page report in a Microsoft Word document

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