FEDERAL RESERVE SYSTEM Harvard Case Solution & Analysis

Federal Reserve System Case Study Solution

Federal Reserve System meeting on May 2nd – 3rd

On May 2nd and 3rd, Federal Reserve held a meeting to discuss the monetary policy for controlling the money supply, interest rate and Federal Reserve. In the meeting, it was discussed that from few past months, the labour market of US seems to be strengthening even as the growth of the economy has been going at a slow pace in these past months. The unemployment rate in the US seems to be dropping, the spending from household has started to increase. The wages and salaries paid to the employees have also begun to rise thus increasing their spending. The inflation rate also seems to be declining which was estimated on its last update in April by 2.4%. The prices of food, energy and consumption products have been declining due to the decrease in the inflation rate. It was observed that the business investments have good progress as well as the improvement of jobs and the economic growth of the country.

Employment Status:

Looking at the employment situation of US in their current economy, the unemployment rate seems to be decreasing. Around 178,000 people have been employed in jobs since the start of the year 2017. The level of unemployment was estimated around 4.5% around the month of march, and it’s been decreasing more. Employment survey has been done over 557,000 work sites to determine their payrolls and income. The average salary was found out to be increased since the year of 2010, this causing the spending of the household to increase.

The purpose of Meeting:

On this meeting, the committee seeks to get the employment rate of US to maximum and also to keep controlling the price stability as it is now. As from few months, the price stability has shown great progress due to the decrease in inflation. The spending of the household has also shown increase in the stable money circulation.

FEDERAL RESERVE SYSTEM Harvard Case Solution & Analysis

Changes in Monetary Policy:

On this meeting, various actions were taken by the Federal open market committee (FOMC) for controlling the monetary policy. The first action was to increase the federals fund interest rate from 0.75% to 1 %. Federal fund rate refers to banks which can charge loans from other banks if they are facing any deficiency of money. The purpose of increasing the federal fund rate was to discourage the banks from not taking loans from other banks as this process would encourage banks to lend less amount of money. As the loans will be hard to get approved, businesses and household will face some financial difficulties but on the other hand, this would cause people to do less spending thus causing the prices of certain items such as property, goods and others to go down.  Another reason for increasing the federal rate is to reduce the inflation rate and keep the employment rate stable.

Federal Reserve System has made no changes to the interest rate even though the economic growth is going through a slower pace.

Reaction

The changes which were made at the committee meeting on monetary policy caused some response to various financial markets. The index Standard &Poor had an impact on the changes of federal rate as it lost by 0.13% on that day closing at 2,388.13.  Most sectors on Standard & Poor which were heavily affected were health care, information technology, utilities, consumer discretionary, telecom services, material and the most profoundly affect was real estate. But Dow Jones index gained from the federal rate changes as it had an increase of 0.04 which closed at 20,957.

Future Prediction:

It is estimated that the labour market of US will keep on strengthening in these few upcoming months and the inflation rate will also have a decrease. Most officials came to believe that the economy would not remain at slow pace permanently but it’s expected to progress after four or five months. It is expected by the federal open market committee that the rates of national fund will further increase during this year. The inflation is estimated to go below 2% this year as the current inflation rate is 2.4%.  The committee will keep on observing the situation the economy regarding inflation, employment and its growth.

The next meeting of this committee is held in the month of June to further discuss on what changes must be made for sustaining the economy...................

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