Michael Watts
On Wednesday, June 19th,
Ben Bernanke and the Federal Reserve issued a statement on the economy. An article on nbcnews.com
discusses the statement and the impact. The report stated that the economy is
increasing, unemployment is decreasing, and inflation is stable. Federal
Reserve Chairman, Ben Bernanke said that the coming days will bring an end to
easy money, including loans and bonds. Bernanke also said that if the economy
persists to improve itself, the asset purchasing program may start to gradually
come to a close at the end of 2013 and finish in 2014.
The Federal Reserve is the central
bank of the United States and consists of the Board of Governors, twelve
regional Fed Banks, the Federal Open Market Committee (FOMC), and the Chairman
of the Board of Governors. The Board of Governors consists of seven members
nominated by the President and confirmed by the Senate to serve terms of
fourteen years. The FOMC is composed of twelve voting members- seven governors
and five presidents of the regional Fed Banks. The Chairman of the Board of
Governors, currently Ben Bernanke, is nominated by the President and confirmed
by the Senate for renewable four-year terms.
One of the functions of the Fed is
to conduct monetary policy by setting short-term interest rates. According to
the article, the Fed stated that it would keep the interest rates near zero.
The Fed also has maintained its target funds rate close to zero, where
unemployment falls from 7.6% to 6.5% and inflation rises from 1.4% to 2.5%. The
Fed predicted that unemployment target will be met in 2014 and cut predictions
on inflation, the annual increase in price level. Another function of the Fed is
maintaining stability of financial systems and containing risk as the lender of
last resort. Furthermore, the Fed supervises and regulates banks and provides
financial services to banks and the government.
In
Wednesday’s statement the Fed stated it would keep the interest rates near zero
and that it would maintain its bond buying plan, also called quantitative
easing, which is to keep an increase in stimulus growth in central banks. Markets sold off quickly with averages dropping
to more than one percent. The five-year Treasury note reached its highest yield
since August 2011 while the benchmark ten-year note broke a 2011 high. Markets
have been waiting for when the Fed will stop its quantitative easing program,
which lead to an increase of $3.45 trillion on the central bank balance sheet.
Actions
and statements by Ben Bernanke, representing the Federal Reserve Board, can
cause immediate and widespread reactions by the stock market, the bond market
and global economy. In turn these
reactions can have strong impacts on the daily lives of average citizens.
Following Wednesday’s statement by Bernanke, the Dow Jones average, an
indicator for prices of stocks traded on the New York Stock Exchange (NYSE)
fell more than 350 points or 2+ percent in one day. This was the largest drop
in the Dow Jones since November 7, 2012. (See nbcnews article).
Works Cited
Fed
will keep pedal to metal on economic stimulus, for now. (2013, June 19). NBC News.
Retrieved
from http://www.nbcnews.com/business/fed-will-keep-pedal-metal-economic-stimulus-now-6C10381923
JeeYeon
Park. (2013, June 20). Dow slumps over 2 percent in worst trading day this year.
NBC
News.
Retrieved from http://www.nbcnews.com/business/dow-slumps-over-2-percent-worst-trading-day-year-6C10390725
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