Federal Monetary Policy

The central bank of the United States is the Federal Reserve, known as the Fed. It is the Fed’s responsibility to take actions, known as monetary policies, that will influence interest rates and the money supply within the economy to obtain the goals of price stability, financial market stability, maximizing employment, and stabilize economic growth. The goal of maintaining price stability by keeping inflation low and stable helps preserve the value of money. Sustaining the financial market promotes efficient flow of funds from savers to borrowers. By cultivating conditions to keep employment high, the fed can promote maximum production to spur economic growth and raise the standard of living for Americans. In order to obtain these goals, the

During this decade, the Fed pursued a discretionary stop-go monetary policy using a trade-off known as the Phillips Curve, which alternated efforts to decrease high inflation and high unemployment. To target high unemployment, the Fed enacted an expansionary monetary policy, or a go period, by lowering the short-term nominal interest rate called the federal funds rate, to loosen the money supply. The federal funds rate is the interest rate that a bank charges another bank when loaning out their reserve balances in order for the other bank to maintain reserve requirements. The Fed chose to target the federal funds rate because it is very influential in the economy, affecting monetary and financial conditions. After inflation mounted during the go period, the Fed would enact a contractionary monetary policy, or a stop period, by raising interest rates to tighten the money

The unemployment rate rose to 5.6% in 1972, when the Fed dropped the federal funds rate from 9% to 4%. By 1973 inflation dropped to 3.21%, and unemployment dropped to 4.9%. As a result, in 1974 the Fed increased the federal funds rate to 11%, and unemployment rose to 5.6%, with inflation spiking up to 6.22%. In 1975, the Fed decreased the federal fund rate from 12% to 5.5% to reduce the mounting unemployment rate, which was at 8.5%. By this time inflation had peaked at 11.04%, and started to dropping. By 1977 inflation was at 5.22%, but started steadily increasing again, landing at 12.18% in 1979. The unemployment rate had peaked in 1975 at 8.5%, but slowly continued to drop through the last half of the decade, ending at 5.8% in 1979 (Bureau of Labor Statistics, n.d.). After the use of the stop-go monetary policy throughout the 1970s, the Phillips Curve proved to be unstable in the long-run because inflation and unemployment did not have an inverse relationship, rather they seemed to be moving together (Sablik,