For the first time, the Federal Reserve introduced a new policy to spur economic growth in the U.S. At its meeting in December, the Federal Reserve decided to tie the interest rate to unemployment and inflation. The new policy received the support of almost all (11 to 1) of the Federal Open Market Committee (FOMC).
The U.S. economy remains weak and the inflation stays very low. The weak economy is a major concern for the Feds and their prior policies didn’t change the economic outlook as they expected. This concern led them to adopt a new three part policy. First, the low interest rate will stay low as long as the unemployment rate stays above 6.5 percent. Second, the inflation for one to two years ahead projected to stay at no more than 2.5 percent. Third, Feds expect the long-term inflation expectations to remain “well anchored.” Before the new policy, Feds didn’t have any numerical targets.
The FOMC makes key decisions on interest rates and the growth of the money supply in the U.S. It was established under the Banking Act of 1933. In 1942, the Act was amended to give voting rights to the 12 members of the committee.