The Federal Reserve Bank’s Federal Open Market Committee (FOMC) was set to convene for their eighth and last meeting of the year to discuss what methods they will enforce their dual mandate of maximum sustainable employment and moderate interest rates with stable prices. With that, the Federal Funds Rate, the rate at which commercial banks lend to each other, took a major hit amongst the dealings with the coronavirus in an attempt to push employment and consumer confidence.
With Covid-19 rates spiking in the end of 2019 and the beginning of 2020 the unemployment hit approximately 14.8% in April and worked in a downward trend for the remaining months due to stimulative fiscal policy and expansionary monetary policy measures that were put in place by governments and our central bank. It was mentioned then that the Federal Reserve will not increase the Federal Funds Rate, the interest rate at which commercial banks lend to each other, until employment hits a steady rate and increases. This rate is to remain low in attempt to push employment and consumer confidence upwards.
Source: Bureau of Labor Statistics & St. Louis’ Federal Reserve Economic Data
In the FOMC meeting minutes for the 2020 year-end meeting that took place December 15-16, it projects that the Federal Funds Rate will remain low until employment and inflation rates are stabilized. Commercial banks are to adhere to these measures put in place as it is to overall aid the ability of banks to loan to each other as they do play a key role not only in the macroeconomy, but in the microeconomy as well; supplying liquidity and credit to businesses, firms, and households. The future of monetary policy is based on the trajectory of Covid-19, public health measures taken, fiscal policy, fluctuations in financial markets and the ability to absorb losses.
Vice Chair of the FOMC Richard H. Clarida stated on January 8, 2021, the Federal Reserve Bank will instate usage of forward guidance with the federal funds rate and will continue to purchase large-scale asset purchases (LSAPs) in order to enhance their balance sheets to push liquidity and credit into the economy. As they previously mentioned that once unemployment stabilized, there would be thought towards increasing the federal funds rate, Clarida mentioned that low employment is not enough at this point to start tightening monetary policy; meaning increasing the federal funds rate. Ideal projections for contractionary monetary policy would yield that unemployment hit its maximum potential, while not focusing solely on the stability of the rate. Regarding inflation the Federal Reserve is also going to put into place their average inflation targeting as they aim for a goal of 2% as this is most consistent with stable prices. They are shifting from inflation targeting in general, to now providing an average goal. With this put into place it allows for firms, businesses, and households to run projections taking into consideration and assumption that inflation will be aimed at, at most, 2%.
Finally, the Federal Reserve notes that monetary policy takes time to come into effect and that a low Federal Funds Rate, building of their balance sheet, and providing forward guidance of the future happenings of monetary policy will be the key tools that will be used in order to bring about economic stability and recovery.
For Release at 2 P.m. EST December 16 … – Federalreserve.gov. www.federalreserve.gov/monetarypolicy/files/monetary20201216a1.pdf.
Speech by Vice Chair Clarida on the Federal Reserve’s New Framework. 8 Jan. 2021, www.federalreserve.gov/newsevents/speech/clarida20201116a.htm.
“Unemployment Rate.” FRED, 4 Dec. 2020, fred.stlouisfed.org/series/UNRATE.