Discussion Response

Responding to John Gonzalaz

Hello,

Thank you for sharing your post. Your analysis of the Federal Reserve’s role in monetary policy is quite informative. Also, it is supported by external research, which makes it incredible: Discussion Response.

The examples of financial crises in the 1980s and 2008 demonstrate how delicate it is to handle monetary policy. The Federal Reserve must maintain a delicate balance between controlling inflation and fostering economic growth (Ciminelli et al., 2022).

Indeed, the monetary policy can have long-term benefits to the economy as supported by the increase in interest rates. Similarly, reducing the rates can stimulate recovery from crises such as that of 2008 and stimulate recovery. I am glad to learn about the connection between community affairs in policymaking from your discussion.

I wonder whether the application of the monetary policy just as in the case of 2008 will bear similar results in reducing the high inflation rates that have been observed during the Covid-19 crisis. I would like to hear your perspective.

References

Ciminelli, G., Rogers, J., & Wu, W. (2022). The effects of US monetary policy on international

Mutual fund investment. Journal of International Money and Finance, 127, 102676. https://doi.org/10.1016/j.jimonfin.2022.102676

Responding to Alex Hampton

Hello,

Thank you for your post. Your discussion entails a strong overview regarding the Federal Reserve’s role in manipulating monetary policy. The connection in your highlight between interest rate hikes in 2022 and the goal of reducing inflation is quite clear to understand. However, citing the 2024 cuts brings a more illustrative example of how the Federal Reserve bases its manipulation of the monetary policy on the prevailing economic conditions.

It offers insight that in 2025, the lowered interest rates will encourage borrowing, which in turn will enhance job growth. However, I wonder whether these cuts in the interest rates may achieve unintended results such as a rise in inflation. Notably, this is so because a sooner easing on interest rates is often associated with unwinding the gains made in controlling prices (Bussière et al. 2021). It would be interesting to explore how the Federal Reserve navigates through this challenge to achieve the maximum benefits from the monetary policy.

References

Bussière, M., Cao, J., de Haan, J., Hills, R., Lloyd, S., Meunier, B., … & Styrin, K. (2021). The

Interaction between macroprudential policy and monetary policy: Overview. Review of

International Economics, 29(1), 1-19.  https://doi.org/10.1111/roie.12505

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John Gonzalaz

The Federal Reserve’s Role in Monetary Policy

I believe the Federal Reserve (the Fed) plays one of the most critical roles in maintaining economic stability in the United States. A key instrument the Federal Reserve uses to influence economic conditions is the federal funds rate, which affects interest rates throughout the economy. When the Fed increases this rate, borrowing costs rise, which can help control inflation by reducing excessive spending.

On the other hand, decreasing this rate makes loans more affordable, spurring both consumer spending and business investments (Mankiw, 2023). While these adjustments might seem straightforward, they have far-reaching effects on everything from employment to the price of consumer goods (Hubbard & O’Brien, 2022).

As someone who values financial sustainability and responsible decision-making, I recognize the complexity of these choices. The Federal Reserve must navigate a delicate balance between addressing immediate economic concerns and ensuring long-term financial stability, a challenge reflected in personal finance and community affairs—which I focus on in my work as a Community Affairs Specialist at the FDIC.

Example 1: Raising Interest Rates – The 1980s Inflation Battle

In the late 1970s, the United States faced a major economic crisis: inflation soared to 13.5% in 1980 (Mankiw, 2023). Prices were increasing rapidly, making it difficult for people to afford basic necessities. Under the leadership of Chairman Paul Volcker, the Federal Reserve implemented aggressive measures, increasing the federal funds rate close to 20% (Board of Governors of the Federal Reserve System, 2021). This made borrowing significantly more expensive, slowing down spending and investment.

This approach succeeded—by 1983, inflation had dropped to 3.2% (Hubbard & O’Brien, 2022). However, there was a trade-off: the economy entered a deep recession, and unemployment rose to 10.8% in 1982, the highest rate since the Great Depression (Mankiw, 2023). While Volcker’s policy ultimately restored economic stability, it also caused short-term hardship for millions of Americans. This highlights the Fed’s difficult balancing act—fighting inflation often comes at the cost of economic growth and employment.

This makes me reflect on the importance of long-term strategic thinking, which I apply in my personal and professional life. Difficult decisions—whether in economic policy, financial planning, or leadership—often require short-term sacrifices for long-term benefits. This principle is also central to my role at the FDIC, where I focus on balancing economic responsibility with community impact.

Example 2: Lowering Interest Rates – The 2008 Financial Crisis

Fast-forward to 2008, and the United States faced a different kind of crisis—the worst economic downturn since the Great Depression. The housing market collapsed, major banks failed, and businesses struggled. As a result, unemployment jumped to 10% by October 2009, leaving millions of people without jobs (Bureau of Labor Statistics, 2013).

To stabilize the economy, the Fed cut the federal funds rate from 5.25% in 2007 to nearly 0% by December 2008 (Federal Reserve, 2008). The goal was to make borrowing easier and encourage spending (Mankiw, 2023). The Fed also implemented quantitative easing (QE)—a policy in which it bought long-term government securities to increase liquidity in financial markets (Hubbard & O’Brien, 2022).

These measures helped. By the end of 2013, unemployment had fallen to 6.7%, and economic growth had begun to recover (Bureau of Labor Statistics, 2013). However, some economists raised concerns that keeping interest rates too low for too long could lead to inflation or create asset bubbles (Mankiw, 2023). This example illustrates how lowering interest rates can jump-start economic recovery but carries risks if used for extended periods.

As someone who values economic adaptability and strategic decision-making, I find this example particularly compelling. It demonstrates the importance of flexibility and responsiveness in times of crisis. The Fed had to act quickly to prevent a complete economic collapse, just as I strive to balance efficiency with sustainability in my leadership approach and personal financial strategies.

The Fed’s decisions on interest rates affect everyone—from how much we pay for groceries to whether businesses can afford to hire workers. Raising rates can help control inflation but may lead to job losses while lowering rates can stimulate job growth but may risk inflation. The challenge lies in finding the right balance, recognizing that every policy choice has real-world consequences for families, businesses, and the overall economy (Mankiw, 2023).

As someone who values clear communication, transparency, and long-term impact, I understand the importance of explaining these policies in a way that people can relate to. Whether in leadership, financial management, or community affairs, making well-informed, strategic decisions—while considering both short-term and long-term effects—is crucial. The Fed’s actions remind me of the balancing act I aim for in my work, ensuring financial sustainability while supporting economic well-being as a Community Affairs Specialist who promotes economic inclusion.

References

Mankiw, N. G. (2023). Principles of economics (10th ed.). Cengage Learning. ISBN 9780357722718

Board of Governors of the Federal Reserve System. (2021). The Volcker era: The fight against inflation. https://www.federalreservehistory.org/essays/volcker-era

Bureau of Labor Statistics. (2013). Labor force statistics from the current population survey. https://www.bls.gov/cps/

Federal Reserve. (2008). Federal funds rate adjustments during the financial crisis. https://www.federalreserve.gov/

Hubbard, R. G., & O’Brien, A. P. (2022). Economics (6th ed.). Pearson.

Alex Hampton

The Federal reserve sets monetary policy in the US by adjusting the amount of money in circulation. The do this by adjusting reserve interest rates and the purchasing and selling of bonds (Mankiw 2024).

An example of the Federal Reserve setting monetary policy is adjusting interest rates. The Fed hiked interest rates a total of 11 times starting in March 2022, making borrowing more expensive for banks, businesses, and people in an attempt to curb rampant inflation (Rodini 2024).  This raising of rates was an effort to lower inflation by taking some money out of circulation and thus increasing the value of the dollar.

According to Picchi (2024) the Fed has had three consecutive rate cuts in 2024. “The Fed cut its federal funds rate by 0.25 percentage points, lowered the rate to a range of 4.25% to 4.5%, down from its previous target range of 4.5% to 4.75% the Fed began dropping interest rates.” The dropping interest Rates are an indication of inflation slowing down.

The decreased interest rates should theoretically lead to more borrowing in 2025. The increase in borrowing should lead to companies being able to hire more employees and decreasing the unemployment rate (Goldman 2024).