Fed Policy
Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed should not begin its exit from expansionary monetary policy because there are problems within the area of employment that have yet to be solved.
Though the goal of the expansionary monetary policy to reduce unemployment is being achieved, the rate of growth has been slow in response. The unemployment rate “dropped to 7 percent”, an achievement considering it was nearly 7.8% in September (Lee, Unemployment rate hits 5 year low). Contrary to expectations, the growth of the US economy has been described as bring “so meager that the economy, by some metrics, is still very sick” (Mankiw, In Fed Policy, the Exit Music May Be Hard to Hear). Recovery today has been slower due in part to the fact that the United States is a service economy, which is unlike economies in the past. In fact, “services have risen from 40 percent to 65 percent of output and from 48 percent to 70 percent of jobs” (Olney, More Services means Longer Recoveries). When there are essentially more services being produced in an economy, g...
... middle of paper ...
... the interest rates, aggregate demand will decrease. Because there is no good that is being produced and no people employed to produce that good, there will be a decrease in disposable income of the workers, and thus lowered consumption because the workers will be wary of spending. As a result, unemployment will increase and inflation will decrease because workers will be willing to work for lower wages - a situation that has occurred in our economy as well. On the contrary, when interest rates are low, the expected rate of return in likely to be higher than the interest rates and thus banks will be more likely to lend money to borrowers. Unlike the previous conditions, spending and output will increase while unemployment decreases, driving inflation higher. This is due to producers passing higher costs of production, which arise from higher wages, onto consumers.
In conclusion, the current macroeconomic situation in the United States is characterized by moderate growth because of better economic conditions that were brought by the events of 2013. The country has experienced moderate economic growth since the 2008 global recession but has shown real signs of momentum. While the country is not concerned about recession or inflation, the rate of unemployment is still a major challenge despite improved consumer and business confidence. As a result, the Federal Open Market Committee or Federal Reserve System needs to adopt fiscal and monetary policy initiatives that help address the unemployment issue and promote high economic growth.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.
This commentary will evaluate the effects of expansionary monetary policy in Turkey. Expansionary monetary policy is the increase in money supply and interest rate (cost of borrowing or return from saving) manipulated by the central bank. The central bank is the monetary authority which controls the overall supply of money in an economy.
Every few years, countries experience an economic decline which is commonly referred to as a recession. In recent years the U.S. has been faced with overcoming the most devastating global economic hardships since the Great Depression. This period “a period of declining GDP, accompanied by lower real income and higher unemployment” has been referred to as the Great Recession (McConnell, 2012 p.G-30). This paper will cover the issues which led to the recession, discuss the strategies taken by the Government and Federal Reserve to alleviate the crisis, and look at the future outlook of the U.S. economy. By examining the nation’s economic struggles during this time period (2007-2009), it will conclude that the current macroeconomic situation deals with unemployment, which is a direct result of the recession.
"Monetary Policy is the most significant function of the Fed; it is probably the most-used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent monetary policy will also be discussed.
In recent years, monetary policy has become the prime tool of government macro-economic policies with a particular emphasis on interest rates as the main control variable within monetary policy. The prominence of interest rates means that monetary policy can affect the aggregate demand. For example, at higher interest rate levels, firms invest less and households spend less due to the increase in the cost of borrowing. Therefore, households and firms are less willing to borrow money for investing or consuming purposes. The rising interest rates also can have an affect on the international world. For instance, if the United Kingdom has relatively high interest rates in comparison to the rest of the world, it will cause the exchange rates to escalate. If the exchange rates rise due to the increase in interest rates, it will dramatically affect the United Kingdom’s competitiveness in the world market. The changes of interest rates and their effects can be explained by the transmission mechanism of monetary policy.
In an economy recently plagued with housing market crashes and financial crisis, we can easily see the vital functions that a monetary policy has on anticipating and preventing instability in our economy. Understanding how monetary policy works and how it’s affected by either rules or discretion is crucial, and all aspects must be taken into account to establish the most effective choice for our economy.
In conclusion, the job of Mr. Greenspan and the Federal Reserve is not an easy one. Whenever money is involved there is always great potential for problems. With the monetary policy always an issue, Mr. Greenspan has to constantly come up with ways to keep our economy steady despite changes nationally and internationally. This recently became a relevant factor. At the very moment Mr. Greenspan was expected to accept his ultimate reappointment as Chair of the FED he was in the process of making it painfully clear that he was not going to allow the rapidly growing economy to foster inflationary imbalances that would undermine the economy's record economic expansion. This and other important factors caused several short-term interest rate increases. This saga continues but the FED with all they have to do has steadily maintained an economy to be proud of for now.
According to “Recent Monetary Policy and the Fiscal Theory of the Price Level” written by Bennett T. McCallum on March 12, 2014 for Camegie Mellon University, McCallum agrees with the idea that monetary policy can curb or end inflation by itself, without the need of backup from fiscal policy. McCallum uses many resources to back up his claim, including some that he had written in the past. He talks about how learnability pertains to the subject matter in the paper and economics. Later McCallum goes into depth about what other economists must think and about how monetary solutions are consistent in the rational-expectation solution. There are different economic models mentioned including the New-Keynesian, and several ‘solutions’ including determinacy. With terms such as SOMC, learnability, and Taylor Principle, then there are also economists such as Milton Friedman, McCallum himself, and Karl Brunner just to name a few.
First, I will discuss the time period between 1973-1974. Because the unemployment and inflation rates are higher than normal, we can assume that the aggregate-demand curve is downward-sloping. When the aggregate-demand curve is downward-sloping, we know that the economy’s demand has slowed down. When the economy’s demand has slowed down, businesses have to choice but to raise prices and lay off workers in order to preserve profits. When employers throughout the country respond to their decrease in demand the same way, unemployment increases.
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
The current state of the economy in the United States has been slow in recent months. While the economy is not currently in a recession, we may eventually fall victim to the first recession we’ve had in nearly ten years. The economy in general is showing growth, just not much. It will be difficult to predict what exactly will happen to the US economy in the future. Many economists do not agree on what will become of the economy. Some feel that we will begin a recession over the next year, and some feel that there is significant policy implementation that will allow us to dodge a recession and regain our economic strength. There are many factors that make up the US economy. The means in which I will discuss the overall growth and current status of the economy is by analyzing the Gross Domestic Product, and discuss the factors that cause it to rise and fall.
Companies. Retrieved July 4, 2008, from University of Phoenix, MMPBL-501 Web site. University of Phoenix . ( 2008). Economics for Managerial Decision Making
Impact of monetary policy on the economy a regional Fed perspective on inflation, unemployment, and QE3 : Hearing before the Subcommittee on Domestic Monetary Policy and Technology of the Committee on Financial Services, U.S. House of Representatives, One. (2011). Washington: U.S. G.P.O.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.