The Federal Reserve Board and
Monetary Policy
A Case Study
March 28, 2006
Stephen Buckles
Vanderbilt University
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Educational Use is Granted
The Target for the Federal Funds Rate
9.00%
8.00%
Target Federal Funds Rate
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Educational Use is Granted
The Target Federal Funds Rate and the Discount Rate
9.00%
Target Federal Funds Rate
8.00%
Discount Rate
Target Federal Funds Rate
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
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Educational Use is Granted
March 28th
FOMC Announcement
• The Federal Open Market Committee
decided today to raise its target for the
federal funds rate by 25 basis points to
4-3/4 percent.
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The reason
• The slowing of the growth of real GDP in the fourth
quarter of 2005 seems largely to have reflected temporary
or special factors. Economic growth has rebounded
strongly in the current quarter but appears likely to
moderate to a more sustainable pace. As yet, the run-up in
the prices of energy and other commodities appears to have
had only a modest effect on core inflation, ongoing
productivity gains have helped to hold the growth of unit
labor costs in check, and inflation expectations remain
contained. Still, possible increases in resource utilization,
in combination with the elevated prices of energy and other
commodities, have the potential to add to inflation
pressures.
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The future
• The Committee judges that some further
policy firming may be needed to keep the
risks to the attainment of both sustainable
economic growth and price stability roughly
in balance. In any event, the Committee will
respond to changes in economic prospects
as needed to foster these objectives.
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A new discount rate
• In a related action, the Board of Governors
approved a 25-basis-point increase in the
discount rate to 5-3/4 percent. In taking this
action, the Board approved the requests
submitted by the Boards of Directors of the
Federal Reserve Banks of Boston, New
York, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis,
Dallas, and San Francisco.
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Educational Use is Granted