Federal Reserve Monetary Policy

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Federal Reserve Monetary Policy
Team A
ECO/372
David Faiella
November 19, 2014
University of Phoenix

The American economy has been through Hell and back in the new millennium, and for some time economist speculated of the dismal circumstances to affect the U.S financial structure as a whole. This paper is going to highlight a variety of current macroeconomic indicators by specifically defining the objectives of the Federal Open Markets Committee and stating the economic projections for 2015 in hopes of painting a clear picture of the current financial state of the U.S economy. With growth reported in GDP and incomes this past year, there is still concern surrounding overall consumer opinions on the state of our nation’s economy. The results of the Michigan surveys index of consumer sentiment as included as well within the Monetary Policy (2014). This demonstrates the country continues to feel the economy is strengthening as well, as their overall confidence of their own financial situations. However, we are still well below average on the index report which also is reported without much change in the last year. Although we have improved our outlook since the recession that occurred in 2008, we remain guarded and safe in our observations. With slowly increasing consumer sentiment, housing starts continue to increase slowly along with our post housing bubble recession recovery (Monetary Policy, 2014). Single family and multifamily starts show a very slow trending increase but at a .6 high index for 2014, we continue to be well below the 1.8 index of 2005-2006, which was prior to the recession. Tighter mortgage loan requirements and significant constraints still on new housing supply is more than likely the reason to account for these results. The positive side of this is reflected though in the continued improvement being witnessed. While there remains to be a continuous increase in overall housing starts and sales, there is report of a current stall in this increase as of mid-2013 (Monetary Policy, 2014). Mortgage interest rates remain significantly low, but there was a visible spike upwards in 2013 which may be contributing to this occurrence. Interest rates were as low as 3.5% at the end of 2012 and are now being reported to be between 4-5%, yet these numbers in comparison to previous reports, are still historically low. Future projections predict there is likely to be a continued delay in growth of the current housing market until other sectors of the economy change their present course. In contrast to the slow increase in consumer sentiment and the housing market, financial developments are trending differently. In particular, interest rates or yields on 10 year treasury securities are on a declining trend dropping 50 basis points by the end of 2013 that continued through the beginning of 2014, all while at a slow declining pace (Monetary Policy, 2014). Some possible explanations for a slower increase could be the lower assessment of the overall global economy’s long run potential growth rate, and a decrease in long-run inflation estimates. Real gross domestic product (GDP) was reported to have decreased in the first quarter of this year, but the available information for the second quarter suggests that the decline was transitory. One of the major concerns is the housing market fell due to the high interest rate in the mortgage rates. Consumers are not in the market to buy new homes causing the market to show a drastic change in the market. The public in general is afraid of losing their homes to the economy and in addition to either a lack of availability of gainful employment. Along with these problems, there exist the issue of borrowing conditions for households and small businesses which have slowly improved, while credit flows to large nonfinancial corporations have consistently remained strong. Unemployment rates showed progress in the first half of the 2014 monetary report study
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