Economic Conditions and Monetary Policy

By Pianalto, Sandra | Economic Commentary (Cleveland), July 2006 | Go to article overview

Economic Conditions and Monetary Policy


Pianalto, Sandra, Economic Commentary (Cleveland)


In order to set monetary policy appropriately, policymakers need to assess current economic conditions, understand how the economy got where it is, and have a good idea of where it is heading. Because economic conditions are always in flux, good communications are important to successful policymaking. Communications can help the public appreciate policymakers' objectives, understand their thinking about the prospects for meeting those objectives, and consider how new information might affect policy choices. This Commentary was adapted from a speech given to the Broadcast Cable Financial Management Association on June 12, 2006, in Orlando, Florida.

As I am sure you are all very well aware, the Federal Reserve's policymaking body, the Federal Open Market Committee, or FOMC', will meet again at the end of June to consider the course of U.S. monetary policy.

Over the next couple of weeks, everyone involved with the FOMC will study a vast amount of data and many economic forecasts. During those same two weeks, we will also see a lot of speculation in the media and elsewhere about what the FOMC will do when it meets on June 28 and 29. Current economic conditions figure prominently into FOMC discussions and the making of monetary policy, and I would like to talk about how I am thinking about current economic conditions and monetary policy and explore how our economy's performance is influencing the Federal Reserve's monetary policy decisions.

Please note that the opinions I express are mine alone. I do not presume to speak for any of my colleagues in the Federal Reserve System.

* How Monetary Policy Decisions Are Made at the Federal Reserve

Let me begin with a few words about how we operate at the Federal Reserve.When news reports talk about "the Fed," they are really talking about a combination of two entities: the sevenmember Board of Governors based in Washington, D.C., and led by Chairman Ben Bemanke and the 12 Federal Reserve Banks around the country.

I lead the Federal Reserve Bank of Cleveland-the Fourth District in the 12-district system. The Fourth District includes all of Ohio, western Pennsylvania, eastern Kentucky, and the panhandle of West Virginia.

Like the 11 other Reserve Banks, the Federal Reserve Bank of Cleveland conduets research on economic conditions, supervises banks, provides financial services to banks and the U.S. Treasury, and serves as a resource for community economic development. And, yes, we also participate in conducting monetary policy-an area that has been dominating the headlines recently.

Monetary policy is conducted by the FOMC', which brings together the seven governors and 12 Reserve Bank presidents. We meet eight times a year in Washington, D.C.

Let me give you a quiek run-through of a typical meeting. One of the first things we consider is projections for domestic and international economic conditions. These projections are developed by the economists at the Board of Governors and are contained in a document known as the Green Book. The projections are reviewed with the Committee, and we use this time on the agenda to raise questions about the projections and discuss issues associated with them.

Next, we discuss what we have been hearing from business leaders in our respective districts about international, national, and regional business conditions. In FOMC meetings, we have what we call a "go "round." We literally go around the conference table, with each of the 19 members offering his or her viewpoint on economic conditions and the economic outlook.

After each member has spoken, it is time to consider policy options, which are outlined for the Committee members in advance in a document called the Blue Book. Then it is time for a second "go "round," with members stating their views on which policy option should be adopted. If it is obvious that members generally agree, this "go "round" can be fairly brief. …

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