Question

gif Open with GRAB ARAGE FOMC Activities Calendar 2007 Announcement Date Time Rate (8) For Against Policy Concern January 31 14:15 5.25 -5.25 March 21 14:15 5.25 -5.25 May 9 14:15 5.25 -5.25 June 28 14:15 5.25 -5.25 August 7 14:15 5.25 -5.25 September 18 14:15 4.75 -4.75 October 31 14:15 4.50 -4.50 December 11 14:15 4.25 -4.25 Related Information 21) US Treasuries Daily Yield Curve | GC >> 27) Federal Reserve FED >> 20 FOMC Statements and Minutes FOMS >> 28) Central Bank Rates CBRT >> 23) Federal Reserve Website 29) Fed Fund Implied Probability | WIRP » 24 Fed Speech Calendar | ECO >> 30 Federal Reserve Liquidity | FLIQ » 25) Historical Rates and Bias | NSN >> 3D) FOMC Dot Plot | DOTS >> 20 Fed Fund Futures | CT » 37 Bloomberg Fed Spectrometer NSN >> 50) News Headlines CN >> 50 U.S. REACT: Fed Plays Coy on Prospects for Future Rate Cuts (2) BI 10/30 52 U.S. PREVIEW: Fed Needs More Insurance in Weaker Economy (1) BI 10/30 53 FED: UNCERTAINTIES REMAIN, WILL ASSESS APPROPRIATE RATE PATH BFW 10/30 54 Fed Plays Coy on Prospects for Future Rate Cuts 10/30 • 1924 193397-4201-224-19 13450 16 EDT 04:00 - a +

Answer 1

A monetary policy can be Expansionary or Contractionary.

In case of expansionary monetary policy interest rates are lowered. This is done to increase the supply of money in the economy, so that consumer spending is increased, which will increase demand. This is done as a measure to combat unemployment and recession

A contractionary monetary policy is adopted when government wants to cut down customer spending. In this case interest rates are raised, so that people are able to buy less and demand is reduced. This is done to lower down rate of inflation and to control the excess money supply in the economy.

It is the monetary policy that influences the slope of the yield curve. A contractionary monetary policy raises the interest rates and inflation. When this subside, it is followed by lowering the interest rates.Whereas short-term interest rates are relatively high as a result of the tightening, long-term rates tend to reflect longer term expectations and rise by less than short-term rates. The monetary tightening both slows down the economy and flattens (or even inverts) the yield curve.

Buying or selling short-term Treasuries

To increase money supply , Fed will start buying short term securities, thus the yield on these securities decreases.On the other hand if Fed wants to reduce the money supply it will start selling these securities, thus raising the short term yields.

Affecting the Fed funds rate

Changes in Fed fund rates also affect the Short term yields. The Fed funds rate is the interest rate at which banks lend funds to each other overnight. The Fed can directly influence this rate by simply signaling to the market that it’s going to either raise or lower the rate. The short term rate is controlled by Fed.This leads to direct relationship between monetary policy and short term yield curve.