Question

• Explain how each of the following may contribute to the effectiveness of monetary policy: establishing news conferences following some FOMC meetings; announcing that the FOMC has an inflation goal of 2 percent in the medium term; and projecting the future path for the federal funds rate.

Answer 1

a.

The monetary policy is one of the tool used by central banks to control inflation. This policy is effective when the public have trust on the central bank about the fact that central banks will do as they say. When FOMC holds press conferences after meetings then it means that people will know and understand about what is happening in these meetings and would compare their experiences with the information they get from press and accordingly build their trust and with increased trust level, effectiveness of monetary policy will increase.

b.

When FOMC declares that inflation goal is 2% and if people trust the announcements made by the central banks then public will adjust their expected inflation rate accordingly and would set prices and wages as per the expectations and it will help bring the actual inflation level nearer to the announced one making monetary policy effective.

c.

When the projected federal funds rate for the future gets announced by FOMC then people get idea about how the future rates of interest will be and accordingly how will be the inflation rate. Then accordingly the set their expectation and if expectations are same as that of FOMC then monetary policy becomes effective as inflation rate will automatically reach to expected levels.