FOMC Has Been Using Open

¶ … FOMC has been using open market operations to achieve sustainable economic growth and price stability?

The Federal Open Markets Committee (FOMC), under the leadership of Ben Bernanke, has used some of the traditional methods of the Federal Reserve Bank to stimulate the lagging economy. For example, it has kept interest rates at historically low levels to encourage consumer spending and for banks to lend to both consumers and businesses. In a January 2010 press release, the Fed indicates that, for the time being, it will continue to keep the federal funds rate (the rate at which banks lend to one another) at 0 to 1/4%. This makes it less costly for banks to borrow money, and thus should theoretically encourage banks to lend to consumers, although there is a great deal of criticism regarding the failure of many banks to take such an initiative.

Lowering interest rates is only one of the Fed's critical tools of monetary policy -- its use of open market operations is another. Through the purchasing of government securities, the Fed can increase the circulation of money in the economy. As a specific response to the housing crisis, the "Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt" ("Press release," 2010). This ensures that the Fed's open-market policies will specifically address the problems that gave rise to the recession, namely the housing boom and bust, and the current epidemic of foreclosures. The Fed has also instituted programs to support consumer and small-business lending (Isidore, 2009).

However, the FOMC can only do so much to improve the state of the economy. It admits that while "household spending is expanding at a moderate rate" consumers remain "constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit" and low job growth ("Press release," 2010). This is why the Fed is les concerned than it usually is about inflation, as prices remain steady in the very slowly growing economy. "The Committee…continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an ended period" and the continued buying up of government securities on the open market ("Press release," 2010). However, the same Republicans in the House and Senate who resisted the passage of the last stimulus bill, despite double-digit unemployment, are agitating for Ben Bernanke to raise interest rates and to curtail the expansive open market operations policy. They also said that the bank bailouts "rewarded" failure, despite the risks of global insolvency posed by mass bank failures (Isidore 2009).

While the Fed certainly could have been more proactive in preventing the credit crisis and recession by demanding greater regulation of creative financial instruments like derivatives and not setting interest rates at historically low levels during the last recession after the dot.com bubble burst, the Fed's policy at present seems sound. Regarding the continued high rate of unemployment, the Fed cannot create jobs: that is a simulative tool that lies in the hands of the federal government, and was the justification for the size of the last stimulus bill.