The term “monetary policy” refers to actions taken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote economic objectives. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy – open market operations, the discount rate, and reserve requirements. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations.
The Federal Reserve affects the demand for and supply of balances held by depository institutions at the Federal Reserve Banks, and in this way changes the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Changes in the federal funds rate trigger a series of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and ultimately, a host of economic variables, including employment, production And prices of goods and services.
Structure of the FOMC The Federal Open Market Committee (FOMC) consists of twelve members—the seven members of the Board of Governors of the Federal Reserve System; President of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are to be filled by the following four groups of banks, and one bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago. Atlanta, St. Louis, and Dallas; Minneapolis, Kansas City, and San Francisco. Non-voting Reserve Bank Presidents attend committee meetings, participate in discussions
Developments in financial markets and open market operations
US data releases generally indicated greater economic resilience than previously thought, and the reaction in market pricing implied an expected higher interest rate path over longer horizons and higher insurance premiums. Policy-sensitive interest rates rose moderately, and longer-term interest rates showed larger increases. Ten-year Treasury yields ended the period higher by more than 40 basis points, and general measures of stock prices fell.
Bank share prices underperformed over this period, but from a somewhat longer view, investor sentiment towards the banking sector appears to have largely stabilized, with less variation in share price movements across bank types. The dollar appreciated broadly against the currencies of advanced economies during this period, with strong US data supporting a moderate increase in yield spreads against these economies amid perceptions that official interest rates were at or near their peak. And in China,
Signs of tension in the real estate sector increased, and optimism about growth diminished further, although broader markets, including global commodity markets, did not show increased concern about China-related risks. Financial conditions in the United States tightened, with higher longer-term interest rates, lower stock prices, and a stronger dollar contributing almost equally to the increase in various indicators of financial conditions.
Addressing the increase in yields on longer-term Treasury securities over the intervening period, the manager noted that the rise in real yields exceeded nominal yields during this period, implying a slight reduction in inflation compensation. Inflation expectations appear to remain well anchored. Market participants cited various factors for the rise in long-term nominal yields, including stronger-than-expected economic data, a potential increase in the neutral interest rate, increased economic and political uncertainty, and greater-than-expected Treasury borrowing.
November Federal Market Committee meeting
Household and corporate borrowing rates rose during this period, generally rising in line with Treasury yields. However, market participants noted that with household and corporate borrowers having limited need to refinance debt in the near term, it may take more time for previous monetary policy measures to be fully transmitted to these sectors. Regarding expectations for the Federal Open Market Committee meeting in September
The Director noted that responses to the Office of the Open Market’s survey of primary traders, the market participant survey and market pricing all indicate virtual certainty that there will be no change in the interest rate. In addition, the typical forecast for the interest rate was that the current target range would be maintained until the FOMC meeting in May 2024, compared to March in the previous survey.
With a roughly one in three chance of 25 basis points. Increase by the Federal Open Market Committee meeting in November. For horizons beyond the middle of next year, the modeled path from the surveys was significantly lower than the market’s implied path. The manager shifted alongside developments in financial markets and office operations. Utilization of reverse repurchase agreement (ON RRP) facilities continued to decline over the intervening period, largely reflecting reduced participation by government and major money market funds even as these funds continued to see inflows.
The increased supply of money market instruments, especially treasury bills, has contributed to a slight increase in money market prices, which appears to stimulate funds to shift from ON RRP towards other instruments. However, the facility continued to provide an effective floor for the federal funds rate. As more Fed asset balances declined, reserve balances grew during this period.
Review of the economic situation
Reserves remained abundant at more than $3.3 trillion. In the September survey of primary dealers, respondents generally saw a lower path to participation in the RRP program and a higher path to reserves, compared to the July survey. By unanimous vote, the committee approved the office’s local transactions during the intervening period. There were no foreign exchange transactions on behalf of the regime during the period between meetings.
Data available at the time of the September 19-20 meeting indicated that real GDP was rising at a strong pace in the third quarter. The labor market continued to tighten, with the unemployment rate falling and job gains slowing but remaining strong. Consumer price inflation was still high. The imbalance between supply and demand for labor appears to be declining. Total nonfarm payrolls rose at a slower pace during July and August than in the second quarter.
The private sector job opening rate and job abandonment rate, both measured by the Employment Survey and Labor Turnover, fell further during July. During July and August, the net unemployment rate rose, reaching 3.8% in August, and the labor force participation rate and employment-to-population ratio also rose slightly.
The unemployment rate among Americans fell, while the unemployment rate among Hispanics rose, and both rates were still higher than the national average. The decline in labor market imbalances was also evident in recent wage data, with 12-month changes in average hourly wages and the labor cost index, and four-quarter change in business hourly compensation, all below their annual average. previous levels.
