Before I talk about the Fed’s decision on Wednesday, I think it is crucial to talk about what the Federal Reserve is so we can have a better picture of what is going on. As most people know, the Federal Reserve is the central bank of the United States. However, some people do not know its important roles of the Federal Reserve. In the United State’s history, a Federal Reserve Bank did not exist for very long time until they encountered with the event when the New York Stock Exchange fell over 40 %. People finally wanted to introduce the idea of a central bank that can control the money supply, interest rates, and overall banking system.
Then what does the Federal Reserve do now? Simply, the Fed has the ability to control or execute “monetary policy”, which is an economic policy that promotes the economic health of the United States. Monetary policy is one of the ways that the Federal Reserve uses, which controls the growth of money supply. Therefore, the Fed regulates the discount rate, reserve requirements and open market operations through monetary policy. According to the Federal Reserve, “The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility- the discount window”. Reserve requirements are the amount that a bank has to hold in reserves.
As shown above, the Federal Reserve serves a substantial role in the economy of the United States that can stimulate the economic health of the United States. This is why it is important to understand what decision the Federal Reserve made on January 28.
For 2015, the Fed said that they would not heavily rely on hyper-expansionary monetary policies. Moreover, the Federal Reserve made a decision to keep short-term interest rates low until at least the summer. Economic activity shows a good pace and unemployment rate has been decreasing compared to last year. However, the central bank is also expecting low inflation, slow global growth, a stronger U.S. dollar and international market turbulence. Although other central banks of other countries lowered their own interest rate and weaken their currencies to fight against inflation and soft growth, Michael Gapen, Chief U.S. economist at Barclays Capital and a former researcher in the central bank’s monetary affairs division said, “The Fed is in a wait-and-see mode”. But the real question we have to ask ourselves is “can capitalism works without a presumed minimum level of inflation”?