Factors Affecting The Long Term Inflation Rate Essay

Factors Affecting The Long Term Inflation Rate Essay

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Even though the feds have a variety of tools to influence the long-term inflation rate, unfortunately

same cannot be said of unemployment rate.

It is a common understanding that by becoming better at controlling inflation, the Feds can effectively

affect the underlying variation in un-employment levels. Historically Feds have always kept price-level

and nominal-GDP as a part of their targeting aims. By ensuring that if either one them falls below their

preferred long-run path, the Feds spring into action by using aggressive monetary easing in the hopes to

get them back on track. Even though aggressive monetary easing does cause inflation, but the benefit is

that raises the employment levels.

To sum up on how the Feds control the unemployment rate indirectly, they use three tools of monetary

policy: Open market operations, the discount rate, and Reserve requirements.

By using these tools at their disposal, the feds are always aiming to influence the supply and demand of

required reserves balance of commercial banks, thus causing alterations to the Feds Fund Rate. A

change in the federal funds rate, according to the Federal Reserve website: "triggers a chain of events

that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount

of money and credit, and, ultimately, a range of economic variables including employment, output and

prices of goods and services."

History of Unemployment regarding to the Fed’s Policies

Starting in the 1970’s the Fed starting targeting the federal funds rate as its operating target. The federal funds rate is the interest rate that depository institutions lend reserves to other depository institutions for short periods of time, typ...

... middle of paper ...

...ng economy. Unlike structural or cyclical unemployment, frictional unemployment is a satisfactory indicator of the economy’s workforce (Krulick, n.d.). A small percentage of frictional unemployment in relationship to the labor force is important. To this regard, the Fed cannot eliminate frictional unemployment in an imperfect economy.
Structural and cyclical unemployment are near impossible to eliminate completely. To reduce one or the other, the Federal Reserve faces tradeoffs between long-term and short-term goals. Implementing fiscal and expansionary policies could result in higher inflation and cyclical unemployment. Timing is another important factor in the imperfection of the Federal Reserve’s policies. The so called “time lag”, the time between when the policy is implemented and when the economy reacts to the policy, is a barrier for accurate control on market

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