Custom essays on The US monetary policy

Part I: Briefly state important issues for the Fed. How do they see these issues impacting the economy and influence their decision on rates?
In general, the US monetary policy has two goals, proclaimed by 1977 Federal Reserve Act: to promote maximal sustainable output and employment. In other words, Fed’s aim is to take short-term measures to stabilize or stimulate the economy. Such factors as lowering employment, inflation being too low or too high, instability of prices and changes in the stock market (e.g. a sustained increase or decrease) influence Fed’s decisions on rates.
In case inflation is too high, or dollar is weak, or stock market is going up too extremely, interest rates have to be increased, in order to maintain stability. In case of growing unemployment instable prices, deflation or falling stock market, interest rates have to be lowered. Currently, low employment and weak position of dollar take place. During 2010, interest rates have been maintained stable at the level of 0.50%.
Part II: Where will interest rates go from here? Why? Will the Fed move from easing to tightening or ease further or will they pause for an extended period?
Currently, interest rates are very close to zero, and they have been staying at this level for a certain time. On one hand, it is necessary to raise interest rates in order to revive economy. On he other hand, weak employment and trade balance are the factors that stimulate to leave interest rates at current level, or even to decrease them slightly. In my opinion, the decision to raising interest rates will be made in 2011, although this increase will be very subtle. It can be stated that rates will practically remain at the same level in 2011. Also, Fed will use other means of reviving the economy; mostly likely, monetary supply will be increased, or larger purchases of securities will take place.
Part III: Briefly discuss current risks: commodity prices, geopolitical and financial market turbulence – overshooting (up and down).
Current risks are rather high, because of two issues. First of all, another wave or recession is expected, as economical growth has slowed down, and this tendency will continue in 2011. Secondly, Fed cannot continue lowering interest rates because of their record-breaking low level and the need to strengthen the dollar as well the need to revive economy, and attract investments. Prices currently are growing, and the instability of prices is another reason increasing risks. Moreover, European economies also unstable, and Chinese trade restrictions are also a reason for concern. In general, risks are to increase significantly.
Part IV: How are costs of capital likely to be affected for your (retail – Wal Mart) industry by upcoming Fed decisions?
The retail industry needs to monitor customer preferences as certain restructuring is expected. Instability of prices and low employment will decrease consumption in 2011. Most likely, consumers would prefer discount stores and cheaper offers as well as online shopping. The costs of capital for retailers might increase due to suggested inflow of money in the economy and slight increase in interest rates. For retailers, it is necessary to be prepared for the increase of interest rates, since it will nevertheless take place, if not in 2011, then in 2012.