It is also worth noting that the Fed must understand how the relationship between its actions and the outcomes changes under different circumstances. For example, open market transactions put more money into the economy; they do not imply that spending will increase. Thus, more money in the economy will not necessarily lead to more growth, lower unemployment or higher inflation, even though the typical relationship is that they will.
The third part of the Fed's mandate is with respect to unemployment. The Fed notes that the central tendency of the unemployment rate in the U.S. is between 5.2% and 6.0%. This is basically the target range that the Fed has for unemployment The Fed only has the ability to influence employment. The employment issue is fairly complex, and there are a number of different variables. Monetary policy instruments are somewhat minor variables compared with some fiscal and trade policy instruments, so the Fed can only work within a range, rather than focusing on one specific target unemployment number.
The Fed typically will influence the unemployment rate by focusing on fostering the conditions for economic growth. By creating the conditions for higher economic growth, the Fed can contribute to a climate that drives down the unemployment rate. Generally speaking actions both in terms of open market operations and the discount rate that either increases the amount of money in the economy or the cost of money will spur economic growth. Ideally, economic growth -- in particular growth in business investment -- should help bring down the unemployment rate.
Recent Performance
The recent economic conditions and Fed action highlights the challenges that the Fed faces in trying to manage the economy. When the economy began to slide badly in 2008, it was accompanied by a credit crunch, so banks were not lending. This stifled business investment. Consumer spending was already off from 2006 levels because investment in real estate -- or spending fueled by borrowing against real estate assets -- was also down. The Federal Reserve responded with fast, aggressive monetary policy, dropping the discount rates to near zero, and engaging in expansionary open market transactions.
These monetary policy tools, which are normally effective for handling slight declines in economic performance, were inadequate for the depth of the slump that was faced. Banks had surplus capital, but were reluctant to lend it, and business investment remained suppressed in response to the sluggish consumer spending. Thus, unemployment...
Federal Reserve Bank Financial services as an industry has progressed to become one of the widely transforming sectors of the global economy, having significant changes in information transference and processing, innovation in terms of commodities and processes, and rapid competition among the financial institutions -- among themselves and also among their several customers. The industry and its part in the transformations in the economy show that the supervising and regulatory structure
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