The and inflation. Normally Federal Reserve is using short-term

The Federal Reserve has a significant
impact in choosing the policy instrument where there are two basic types of
instruments which reserve aggregates and short-term interest rates. The
long-term interest rate is not directly affected by a Federal Reserve tool but
it is linked to the actual goals. Besides that, Federal Reserve have set an
interest rate target, known as inflation targeting to hold up future inflation.
There are some criteria for choosing policy instruments to monitor on future
inflation and impact to the economy growth. The first criteria is observable
and measurable, the short-term interest rates will be observe instantly but is
more accurate to measure cost of borrowing by real interest rate. The second
criteria is controllability, which for aggregates and interest rates have the uncontrollable
parts that not able to totally control on the monetary aggregates. It can
control on the short-term nominal interest rates but they cannot directly
control on the short-term real interest rates. The third criteria is
predictable effect on goals, the link between the interest rates and monetary
policy goals is better than the link between monetary aggregates and inflation.
Normally Federal Reserve is using short-term interest rates as their policy
instrument because it offer the best links to monetary goals but they are still
use reserve aggregates. Besides that, Federal Reserve has using a fed watcher for
responsibility to predicts when interest rates high and acquire funds to lower
the interest rate. Meanwhile, the fed watcher need to predict when interest
rates low and make loan at high interest rate to higher the interest rate. Some
of argue that low interest rates had contributed to the housing bubble because
Federal Reserve had hold interest rates too low for too long time. During
2001-2002 recession, the Federal Reserve dramatically lowered the interest rate
from 6.5% to just 1% and this had led many banks for easy credit to make a lot
of loans. But in 2006 Federal Reserve had increased the interest rate to 5.25%
led the demand on purchase house had decreased, the main reason is because
burden of increased monthly payments for long-term mortgages. After the
increasing on the interest rate had lead the foreclosures increased because the
mortgage borrower not able to make monthly payment and dropping the housing
price. The former chairman of Federal Reserve of the United States and an
American economist, Mr. Alan Greenspan had confessed one of the reason caused
the housing bubbles was declined long-term interest rates. Some people had
criticized the Federal Reserve decreased the interest rates that inflated the
housing bubble. During 2000 and 2003, the interest rate on 30 years fixed-rate
mortgages had dropped 2.5% and interest rate adjustable rate mortgages had
dropped 3%. Decreased in mortgage interest rates had reduced the cost of
borrowing mortgage attracted many people wanted to borrow money to purchase a
house and this had led the price of house keep increasing. Many people borrowed
money from mortgage and securitized it turned into AAA-rated securities. The
people belief on house prices would not decreased started inaccurate because of
the delinquency rate get higher and the price on mortgages–backed securities
had led the house prices decreased promptly. The cost of cleaning up after the
housing bubble burst is expensive because it need take time to slow
recovery.