Monetary

Monetary Policy

Monetary Policy is a strategy guiding solution for all kinds of economic and financial decisions people make in this country. It influences the performance of the economy – as reflected in such factors as inflation, economic output, and employment - mainly by raising and lowering short-term interest rates. It gives us the initiative whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market.

In Washington D.C., twelve members of the Federal Open Market Committee meet eight times a year and are responsible for conducting monetary policy. They comprise seven members of the Board of Governors, the President of the Federal Reserve Bank of New York, and four of the other Reserve Bank Presidents, who serve in rotation and contribute to the Committee's discussions and deliberations. Each Director of the Reserve Bank contributes to monetary policy by making recommendations about the appropriate discount rate, which are subject to final approval by the Governors. Any change in real interest rates affects the public's demand for goods and services.

A decrease in real interest rate lowers the cost of borrowing and leads to increases in business investment spending and household purchases of durable goods such as autos and new homes. Lower rates and a healthy economy also increase banks' willingness to lend to businesses and households. This may increase spending, especially by smaller borrowers who have few sources of credit other than banks.

Typically, this is in favor of consulting firms such as Watson Wyatt Worldwide. With lower real rates, Watson Wyatt stocks are more attractive than bonds and other debt instruments. For an individual like me who hold Watson Wyatt stocks in my portfolio, I find that the value of my holdings are up; this increase in wealth makes me willing to spend more....