Because of the deterioration of labor market conditions, there has been a considerable reduction in consumer spending, investment in businesses, and industrial production “The Federal Open Market Committee (FOMC) made a decision to ascertain a target object for the funds’ rate from 0 to 0.25 percent. This measure was necessary because the position of the economy was quite weak, credit conditions were at an all-time low and financial markets were overwrought. This also resulted in controlling inflation and because of the necessary financial measure taken the cost of energy has gone down. And due to the weak performance of other commodities, the Committee is quite hopeful that inflation will be further restrained in the coming quarters.
Establishing a target range was meant to support the operations of financial markets and institutions and motivate the market through open market operations to maintain the figures of the balance sheet of the Federal Reserve at a high level.
Additionally, the Federal Reserve bought huge amounts of agency debts and mortgage-backed securities to ease pressures on the housing market and had plans to further expand such purchases if market conditions require these purchases. The Federal Reserve is looking into additional ways of using its balance sheet to further ease pressures on credit markets to boost the economy.
In another related development, the Board of Governors gave their assent for a 75 basis point reduction in the discount to ½ percent. This action established interest rates on obligatory t rates including excess reserve balances of 0.25 percent.
The FOMC has implemented these fund rates to curb unemployment and housing mortgages and there have been recent improvements in both sectors. Towards this, the FOMC has continued to purchase mortgages to the extent of $40 million per month to keep the target Federal Funds at 0 to 0.25. This realistically low rate for federal funds will serve for the time it takes to go above 6 1/2 percent.
When the time comes for the removal of this balanced approach to curbing employment and improvement in the housing situation, the FCOM will have reached its objective of maximum employment and control and keeping inflation at 2 percent.
Because the conditions in the job market are considered to be the misuse of both human and financial capabilities, the Feds will continue with this plan for the time necessary for economic recovery and establish stable prices. This is yet another innovation that links Fed Funds to economic indicators that will bring the nation out of recession and on the way to economic recovery.