Question

Take a look at the latest report from the Federal Open Market Committee (FOMC) . According to this release, what is the Federal funds rate? How much did it change in the current period? Will this result in an increase in the money supply? A decrease? Or no change? How will this affect unemployment? How will this affect inflation?

Answer 1

1: The Federal funds rate is 0 to 0.25%

2: There is no change in the federal funds rate.

3: Keeping it low, increases the money supply as borrowing funds becomes more attractive.

4: This is expected to increase employment in the economy.

5: A low federal funds rate will increase inflation.

Explanation:

1: The Federal funds rate is 0 to 0.25%

2: There is no change in the federal funds rate. It remains the same.

3: The federal funds rate is that rate at which commercial banks borrow and lend excess reserves to each other. Keeping it low, increases the money supply as borrowing funds becomes more attractive. This represents an expansionary monetary policy.

4: The low federal funds rate is expected to stir the economy and increase investment in capital projects. This is expected to increase employment in the economy.

5: A low federal funds rate impacts the mortgage rates in the economy and keeps the mortgage rates low. This makes borrowing more affordable and people have to pay lesser interest on the loans. The result is that lower cost of financing increases demand for goods and services thus increasing inflation.