(DailyVantage.com) – The Federal Reserve raised interest rates to a 22-year high following unprecedented inflation of 9.1% in June, a 40-year record that sparked concern about a potential recession. The rate rise of 5.25% to 5.5% was passed unanimously by the Federal Open Market Committee (FOMC). The U.S. government has entrusted the FOMC with controlling its monetary policy. While there is supervision by Congress, it is in the form of committee hearings and confirmation votes.
In a press conference, Chairman Jerome Powell said, “I remain squarely focused on…maximum employment and stable prices for the American people. We understand the hardship that high inflation is causing…We remain committed to bringing inflation back to our 2 percent goal.”
There are three tools that the Federal Reserve uses in its monetary policy: open market operations (OMO), the discount rate, and reserve requirements. OMO is the process of the sale of bonds for bank reserves, the discount rate is the interest the Federal Reserve charges banks for loans, and the reserve requirement is the percentage of a commercial bank’s deposits that it must keep in cash.
The interest rate hike falls under the discount rate power that the FOMC uses. The three types of credit offered by the Federal Reserve Banks include primary and secondary credit, and seasonal credit, each with its own interest rate. With an increased rate for commercial banks and other depository institutions, the FOMC hopes the money created during the loan-making process decreases. The increased rate could lower inflation closer to the Federal Reserve’s two percent goal.
With high inflation negatively affecting the pocketbooks of American households, the continued monetary policy decisions made by the Federal Reserve will increasingly fall subject to political discussions as economic issues grow in importance to voters. In June, Powell testified before House and Senate committees, and while Congress can ask the Federal Reserve members questions, the monetary policy is ultimately the decision of the FOMC.
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