Course Basic Macroeconomics Part 1: Janet Yellen’s Speech

Name
Instructor: Professor Sinha
Course: Basic Macroeconomics
Date
Writing Assignment
Part 1
Part 1: Janet Yellen’s speech
Based on your reading of the attached article, please answer the following questions. For each of the parts, the approximate word limits are noted below.
1. What are some of the main concerns facing the Federal Reserve as it decides on whether to raise interest rates?
The Federal Reserve (Fed) raises the interest raised based on future outlook that the economy will improve, Janet Yellen the Fed Chairwoman has raised the interest rates few times since the 2008/2009 global financial crisis. As the unemployment rates fall the rates have compared to the previous period where they were kept low to encourage firms and individuals to boor at low cost to boost the economy. Higher interest rates indicate that the economic performance is robust, and failure to remove the stimulus that had already been implemented after the global recession would increase the risk of the economy overheating at a time when there was labor improvement.
There is concern that higher interest rates will likely change the inflation rates where the short-term interest rates affect the long-term interest rates and as the cost of borrowing rises this is associated with changes in the economic activities and inflation rates. Even when the interest rates were low the inflation was low which was unexpected, and when raising the interest rates, the Fed was cautious since the inflation was lower than desired. The Fed has also evaluated the impact of not doing anything, and as the low interest rates spurs financial speculation when the economy iris growing this is likely to be more speculation.
The interest rate was raised when there was high optimism about the economic performance since Yellen was more confident that the economy was resilient. Higher interest rates would then not affect the people’s ability to borrow since more would be employed and even if a rate hike resulted in higher borrowing costs. As the interest rates are useful to adjust the supply of money, the Fed looked at price and output stabilization after the interest rate hike based on the prevailing economic conditions.
2. What are the tools that the Federal Reserve has traditionally used to conduct monetary policy?
The open market operations are the main monetary policy tools, and involve buying and selling government securities in the open market. This is aimed at expanding of contacting the reserve balances of the banking system. This influenced the interest rate in the federal funds market and this affects the short-term and long-term interest rates. The federal funds rate represents the rate at which the backs charge each other for the loans of reserve balances. When the Federal Open Market Committee (FOMC) lowers the target for the feral funds rate more securities are purchased on the open market and this creates money and the federal funds rate fall and the short term and long term interest rates also fall, and this simulates the economy. Another tool at the Fed’s disposal is the Reserve Requirements, where financial institutions set aside a proportion of deposits as reserves that are cash at hand or held at a Reserve Bank. While the Fed does not normally the reserve requirements, when necessary it can be alerted to influence the demand for loans. Additionally, the Fed focuses on the discount rate changes focusing on the targets to influence economic performance.
3. Identify two new, unconventional strategies used the Fed to conduct monetary policy in the most recent crisis that are discussed in the article.
The two unconventional strategies to conduct monetary policies were large-scale asset purchases and increasingly explicit forward guidance. During the global financial downturn increased government spending was not enough to improve the economy and since the Feds funds rate was near the zero rate bound unconventional methods like the Large-scale asset purchases (LSAPs) was used. This involved the purchase of government bonds and the mortgage-backed securities. In this way the government focused on reducing rates of risky lending where t...