Should Feds Continue with Expansionary Monetary Policy or Exit Strategy?

The Federal Reserve has the dual job of ensuring price stability and maximum employment, which are contradictory objectives. The Feds try to achieve the goals through monetary policy which determines the demand and supply of money by controlling interest rates. The Fed’s goal is to achieve a natural rate of unemployment of more or less 5%. When the actual unemployment figures are below the natural rate of unemployment, inflation increases and there is a high demand of goods and services propelling the economy with the ensuing labor demands and the pressure it places on wages, which in turn produces inflation. When the Fed is faced with this scenario, it must increase the rates to slow the growth and achieve price stability (contractionary cycle).

When there are problems in the United States economy, whom do the people turn to? The most obvious answer is the government. The federal government is given the responsibility of maintaining a stable economy. When the economy is not stable, like during a recession, the American people turn the government and demand that they fix whatever problem is occurring. The government can handle the economy in a recessionary period in one of two ways: expansionary fiscal policy or expansionary monetary policy. The sector of the government that handles the economy using these policies in a recession is the Federal Reserve. The best course of action to get the United States out of a recession is to use expansionary monetary policy.

The Federal Reserve is currently implementing expansionary policy. When the Federal Reserve implements expansionary policy, their goal is to increase money supply, and in turn helping to grow the economy. During expansionary policy taxes are cut, and there is typically an increase in government spending. Expansionary policy is also implemented to decrease unemployment and increase inflation. I think that using expansionary policy could be a good thing for the economy of the United States. I think with the goals of decreasing unemployment, increasing money supply, increase government spending, and grow the economy this could be a good thing for the economy of the United States. I think that decreasing the unemployment rate is particularly

When the Federal government has to find ways to regain any money lost they lean on the expansionary Fiscal policy and the monetary policy to regain money into the economy. Whether, a change in taxes or even government spending. Even to the three major tools of the expansionary monetary policy to focus on. In the first part of this paper, I will discuss the expansionary fiscal policy and how the Federal government was involved and the changes that needed to be made to taxes, government spending. The second part of this paper, I will discuss the monetary policy and the tools the Federal Reserve used when under this policy. The expansionary fiscal policy was out to kick start the economy, and the expansionary monetary policy was out to change interest rate, and influence money supply. When discussing these two policies you have to think about one aspect when will it ever stop? Will a policy always have to be part of the economy to help the government one way or another?

Over the past decade, the Fed has responded fairly to inflation and unemployment. According to the Federal Reserve (2017), between late 2008 (the era of the Great Recession) and October 2014, the Federal Reserve purchased longer-term mortgage-backed securities and notes issued by certain government-sponsored enterprises, as well as longer-term Treasury bonds and notes. In essence, lowering the level of longer-term interest rates and improving financial conditions (the Fed.com, 2017).

The article by Justin Wolfers describes how the Federal Reserve System (Fed), also known as the central bank of the United States, can alter monetary policy to help the economy recover during downtimes and recessions. Although the Federal Reserve System is not technically a political institution, such as that of the Bank of Canada, after it was nationalized in 1938, with its overall responsibilities lying with a board of directors. In other words, the Fed does not stack the deck to assist either the Democrats or Republicans; their decisions can still be influenced by congress and presidential elections due to the fact that a lot of the principles in money and banking are political. For example, changes in fiscal policy can also help an economy recover, which is defined as policy that involves decisions about government spending and taxation. Additionally, if the Fed were to turn to unconventional measures leading up to an election, political outrage, especially from Congress, would be likely. Therefore, these policy-makers at the Federal Reserve System are often left inadequately prepared to respond to an economic downturn or recession.

To begin, the article explains the Federal Reserve’s plan to take a careful approach to enacting contractionary monetary policies, policies used to decrease money supply, in the future. Last December the Federal Reserve raised the interest rates after they had been near zero for years to ensure inflation was kept in check and to promote economic growth. It appeared the economy would be in for another increase in the interest rates sometime this year, but the Feds have rethought that strategy. If the Federal Reserve were to continue to raise interest rates it would have short-run and long-run effects on the Money Market, Goods and Services Market, Planned Investment, Phillip Curve, and Aggregated Supply and Demand. These effects are aspects that have to be considered because they express and explain the effects the increase in interest rates has on the economy and explain if the Federal Reserve is enacting the correct policy to achieve their goal.

Obviously all of these factors can have some kind of effect on the economy. With cut backs comes a slowdown in output and production from businesses and can cause inflation to occur where people make the same or less amount of money but the price of goods goes up. Essentially, interest rates control the whole economy: if interest rates go up then the economy slows down and vice versa. However if interest rates go too low or stay low for a long period of time it can lead to inflation which also hurts the economy. In essence, higher interest rates are not necessarily a bad thing. Higher interest rates can curb inflation, meaning your pay will go further. A good example of this is the price of gasoline. When the price of gas goes up people drive less and spend less because more and more of their income goes toward fuel. When the price of gas goes down people have more money to spend. The increase in spending will be seen somewhere in the economy whether it is at the grocery store or online internet sales.

Interest rates are manipulated by expanding or contracting the monetary base. This comprises of circulatory currency and reserves in

The Fed is the thing that fixes our economy. Whether we like it or not, it will

I agree with Paul Krugman. The Federal Reserve Bank should put more money into economy because it can stop increase inflation. I believe that if the Federal Reserve Bank will put in more money in the economy this would bring positive outcomes. Money putted in the economy will regulate number of inflation. Also, Arnold says that” If according to classical economists, the economy is self-regulating, then a recessionary gap or an inflationary gap is only temporary”(266). It is true that inflation gap can be stopped because it is temporary and if the Federal Reserve Bank would put money into economy it will help to stop inflation. Besides, if the Federal Reserve Bank puts money into economy to invested, more people will invest at low interest

Finally, the process of normalization has begun, and seven years of zero interest rate cycle came to an end in December 2015 with a hike of 25 basis point by the Federal Open Market Committee. It was a much anticipated move for a while, and now the debate is on the roadmap of future interest rate hikes. Several economist, analyst, and media personalities have expressed a variety of opinion on both ends of the rate hike. Should the Fed continue to raise interest rates now, is the question of global consideration. In my opinion, Fed should continue to raise interest rate now to help the economy grow more independently and build up consumer confidence.

On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, the committee agreed to continue its monthly $85 billion purchase of Treasury and mortgage-backed securities as long as the unemployment rate remains above 6.5 percent. Inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal and longer-term inflation expectations continue to be well anchored .

This approach allows the Fed to work with both supply and demand sides of the economy. This allows the Fed to increase production, maximize employment, and provide reasonable credit. The Federal Reserve's three tools are the open market operations, the discount rate, and reserve requirements. The open market is how the Fed buys and sells securities based only on price and without prejudice. This FOMC(Federal Open Market Committee) sets a target for the federal funds interest rate. They purchase securities that allow them to expand or contract the interest rate to meet their goal. The discount rate is the interest rate the Reserve Banks charge commercial banks for short-term loans. The discount rate allows commercial banks to meet the reserve requirements. Lowering the discount rates is expansionary, as the discount rate influences other interest rates. Conversely, raising the discount rate contracts the money supply for the same reason. Lastly, there is reserve requirements. This is the amount of money commercial banks are required to have in their vaults or in a federal reserve bank. Lowering the reserve requirement expands the money supply; because it frees up more money for the banks to lend. When the reserve requirement is high; the commercial banks are unable to put out more loans. This will contract the money supply; unless the bank can monetize some of its debt. Paul Volcker was able to use economic policy to break free of the stagflation that had held our economy since the 70's. He was able to curb the rising inflation by

Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.