What is the role of the Federal Open Market Committee (FOMC) in monetary policy?
Rising inflation can have both positive and negative effects on India's GDP. Here's a nuanced explanation: *Positive effects:* 1. Increased aggregate demand: Moderate inflation can stimulate consumption and investment, boosting aggregate demand. 2. Economic growth: Higher demand can lead to increaseRead more
Rising inflation can have both positive and negative effects on India’s GDP. Here’s a nuanced explanation:
*Positive effects:*
1. Increased aggregate demand: Moderate inflation can stimulate consumption and investment, boosting aggregate demand.
2. Economic growth: Higher demand can lead to increased production, employment, and economic growth.
3. Monetary policy: Inflation can prompt the central bank to maintain low interest rates, encouraging borrowing and investment.
4. Fiscal policy: Government spending and tax reforms can be tailored to mitigate inflation’s impact on vulnerable populations.
*Negative effects:*
1. Reduced purchasing power: High inflation erodes consumers’ purchasing power, potentially reducing demand.
2. Uncertainty: Volatile inflation can create uncertainty, deterring investment and consumption.
3. Inequality: Inflation disproportionately affects the poor and fixed-income households.
4. Currency depreciation: High inflation can lead to currency depreciation, making imports costlier.
*India-specific factors:*
1. Demand-driven growth: India’s consumption-driven economy benefits from moderate inflation.
2. Investment-led growth: Inflation can stimulate investment in infrastructure and industry.
3. Rural demand: Inflation can boost rural incomes and demand, supporting agricultural growth.
4. Government initiatives: Policies like Make in India, Digital India, and infrastructure development can mitigate inflation’s negative effects.
*Conditions for inflation to boost GDP:*
1. Moderate inflation (4-6%): Avoids stifling economic growth.
2. Supply-side measures: Improving productivity and efficiency can offset inflationary pressures.
3. Monetary policy management: Calibrated interest rate adjustments can balance growth and inflation.
4. Fiscal prudence: Targeted government spending and tax reforms can support growth.
*Data and projections:*
1. RBI’s inflation target: 4% (+/- 2%) CPI inflation.
2. India’s GDP growth projections: 7-8% (FY2024-25).
3. Inflation projections: 5-6% (FY2024-25).
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For U.S. Monetary Policy, as a part of Federal Reserve System (FED), Federal Open Market Committee (FOMC) is the primary decision making body and plays 6 important roles/functions which are as under :- 1. Forming Monetary Policies • Determining the appropriate monetary policies to achieve theRead more
For U.S. Monetary Policy, as a part of Federal Reserve System (FED), Federal Open Market Committee (FOMC) is the primary decision making body and plays 6 important roles/functions which are as under :-
1. Forming Monetary Policies
• Determining the appropriate monetary policies to achieve the Fed’s dual objective of price stability and maximum employment.
• It also provides evaluation of current economic & financial policies and forward guidance about the likely future path of monetary policies.
2. Communicating Monetary Policies
• The FOMC issues statements after each meeting, providing insights into its policy decisions and economic outlook.
• This communication assist in managing market uncertainty and ensures transparency to the public.
3. Conducting Open market operations
• Buying & selling government securities is the primary tool used by the FOMC to influence interest rates and the money supply.
• By Purchasing securities ensures liquidity into the banking system and lowers the federal funds rate, while vice versa in selling securities.
4. Influencing federal funds rates
• Federal Funds Rate is the interest rate that banks charge to each other for overnight loans.
• By adjusting this target, the FOMC can affect interest rates throughout the economy including mortgage, loans, etc.
5. Ensuring Economic Stability
• Boost economic activity by lowering interest rates to encourage borrowing and spending.
• Raising interest rates can slow down economic growth and reduce inflation.
6. Quantitative Easing (QE) and Tightening
• During financial crises, the FOMC may engage in unconventional monetary policy measures like Quantitative Easing (QE) & Tightening.
• In QE it buys large quantities of longer-term securities to lower long-term interest rates and stimulate the economy.
• In Quantitative Tightening it sells these securities to tighten monetary conditions.
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