Monetary policy consists of central bank, currency board or other regulatory committee that determines the size and rate of growth of money supply which in turn affects the interest rates. It also discusses on various economic activities and offer clues on the outcomes of future economic growth.
In the recent interview by Janet L. Yellen, the Fed Chairwoman, emphasized the need for patience, convinced many investors that the Fed policy making committee, will not seriously consider raising interest rates until June.
When interest rates are stable the investors can reap the benefit of stability in their own finances and minimizing the risk of exposing funds to the fluctuating market. When there’s possibility of changes in the interest rates fluctuation the investors are subject of facing risk in the future. A stable financial system is one in which financial institutions, markets and markets infrastructure facilitate in the smooth flow of funds between the savers and investors. This help to promote growth in economic activity.
Since the committee met in March it indicates that the labor market conditions have improved even as the growth in the economic activity is slowed. Labor Market Conditions Index (LMCI) plays a crucial role in helping the Fed with one of his important factor i.e ensuring maximum employment. Increase in strong job employment points to additional strengthening the labor market.
Growth in household spending is within the reasonable and proper limits. The housing sector has improved further but investments in physical assets such as machinery, land, building, installations etc. and net exports have been soft . Inflation has continued to run below the committee’s 2% longer run objectives. Committee continues to closely monitor inflation indicators and global economic and financial developments.
The Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.The committee expects that the economic conditions would evolve in the manner that would warrant only gradual increase in the federal fund rate, and that federal fund rate was likely to remain, for some time, below level that was expected to prevail in the longer run.
Federal fund rate is one of the most important and influential interest rates in the U.S economy, since it affects the monetary and financial conditions, which in turn have an impact on the key aspects of the broad economy including employment, growth and inflation. It is all dependent on the interest rates decided by the committee that the economics activities in the country are going to result accordingly.