FOMC Meeting: Summary of Minutes on Policy Rate Tools - Essay Sample

Introduction

The Federal Open Market Committee (FOMC) held a joint meeting with the Board of Governors on Tuesday and Wednesday (29th-30th October 2019) starting at 9.00 am on each day. The meeting took place at Washington DC in offices of the Board of Governors of the Federal Reserve System. The following is a summary of the minutes of that meeting.

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Tools of policy rate formed a very important part of this meeting. The members began by focusing on financial strategy tools that could improve the delivery of an enhanced economic stimulus and boost fiscal outcomes. In this respect, the participants deliberated on the value of date-based, qualitative and outcome-based forms of fiscal management that could guide them on the aspect of accommodation. They agreed that going forward, FOMC expected a positive economic outlook to avoid scaring investors and consumers.

The participants also agreed that the longer-term and negative interest rates were no longer effective in strengthening the monetary policy in the United States. They, therefore, suggested that balance sheet tools could be effective in capping interest rates, and this would provide an opportunity for stimulus in the money market. The members noted that the decline of equilibrium real interest rates and shortfalls in inflation provided stimulus at the Effective Lower Bound (ELB) thus no need for adjustments in the federal funds rate to sustain the economy. It was resolved that with a range of policy tools, it would be possible to anchor inflation expectations and remain focused in line with the FOMC's economic strategy. The participants further agreed that there was need to monitor the influence of Treasury bill purchase and repo operations of the Federal Reserve on the financial markets and general economy.

Due to the slow increase in government spending as well as the deliberately soft business investment, it was projected that the real GDP would not rise as fast in the second half of the year as compared to the first one. Therefore, the participants agreed that since the real GDP growth was directly related to inflation and unemployment rates, a downward revision was paramount. Nevertheless, with the rising household spending, the labor market showing signs of stability and the economic activity increasing at a reasonable rate, participants regarded the economic outlook with optimism. The members, however, noted that with the declining exports, challenges in the agricultural sector, low petroleum prices, the impact of Brexit, a declining global economy, trade tensions, and the recent strike at General Motors, strategic policies were crucial in boosting the country's GDP. The committee has an objective to achieve on the basis of a strong economy that has a positive outlook. They evaluated the downside risks of the real GDP and agreed to decrease the target federal funds rate as an insurance against the downside risks. The target range would be between one and a half and one and three quarter per cent. This range would be in line with the committee's symmetric 2 per cent objective.

In general, the participants in the joint meeting between the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System agreed that strategic measures were crucial in maintaining a positive economic outlook in the United States. They reviewed briefings and suggestions that would ensure the achievement of the symmetric 2 per cent objective. The participants discussed policy rate tools and agreed on strategies that would lead to a sustainable economic stimulus. They noted that despite the various economic challenges, the labor market had remained stable, with unemployment rates relatively low, but the real GDP had to be revised downwards, despite the risks, to cushion the economy in case of inflation and, at the same time, maintain the federal reserves.