1. Describe the actions taken (if any) by the FOMC as reported in each statement. Explain the reasoning behind the FOMC’s actions (or lack thereof) as reported in each statement. What effects do you think the FOMC’s policy decisions will have on M2?
Instructions for Part III: Monetary Policy and the Fed Funds Rate
Almost always when the FOMC makes a policy change, it attempts to either increase or decrease the Fed Funds rate. An increase raises the cost of bank funds which leads to a reduction in lending and, ultimately, the money supply. In addition, an increase in the Fed Funds rate usually leads to an increase in other interest rates. The effect is to slow down the economy to reduce the threat of inflation. Exactly the opposite occurs when the Fed lowers the Fed Funds rate.
To check on recent changes in the Fed Funds Rate, go back to the St. Louis site. Click on Research… then on FRED… Click on Categories then on Interest Rates. Click on FRB Rates…then under Effective Federal Funds Rate check Weekly and then click on the link. Click on 1yr at the top of the chart, then print it.
Questions for Part III
1. The Fed Funds rate should reflect the recent FOMC policy actions you discovered earlier (either up, down or steady). What does the chart tell you about past FOMC monetary policy decisions during the time period shown?
Finally, click the Back button on your browser 2 times to return to the Interest Rate Data section. Click on Treasury Bills then under the 3-Month Treasury Bill Rate, Secondary Market heading, check Weekly then click on the link. Select 1yr as above. Print the graph.
2. Is there any evidence that Fed policy can affect interest rates other than the Fed Funds Rate? Explain.
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