Inflation is a challenge for Federal Reserve officials because it affects the financial policies of the US greatly. Although the Fed has decided to trim the massive bond-buying stimulus, unemployment is crippling the economy. Therefore, this persuades the policy makers to focus on the unemployment issues, in order to reduce the rate to 6.7%. However, bad weather has contributed to a slow hiring process hence low employment rate in the country. On the other hand, for the past two years, inflation has hit the economy badly and made it hard to achieve the Fed’s 2% goal.
Economists believe that, when the job market heals, the rate of inflation will rise. On the contrary, the Fed’s President states that, with this low trend of inflation, it is a true reflection that there should be something wrong with the economy status. Therefore, the policy makers ought to incorporate all aspects of the economy in the model. Across the world, the energy and food prices keep on increasing. In the USA, for the past three years, prices for durable goods have been decreasing; however, this is because the retailers discounted prices to lure the shoppers. Therefore, the commerce department warned that that was not an indicator of the inflation recovery in the USA.
Similarly, in the Euro zone, both inflation and deflation have posed a challenge for the central bank. As such, the Fed new chief Janet Yellen advices the policy makers to stretch hard to tame inflation because, when the inflation rate is low, it results in unemployment. Therefore, it should be the focus of the policy makers. There is a need to maintain inflation at 2% so that the Fed can ramp stimulus without problems. Ironically, the Kansas City Fed president George thinks that the low inflation experienced in the country is caused by changes in the price index calculation, low health costs, and low import prices. Moreover, George claims that, if the Fed continues to add new assets to its balance sheet, it will result in the future inflation.
The current chairperson of the Federal Reserve System is Janet Yellen, the first woman to hold this position (Saphir & Spicer, 2014). She entered upon the office when the U.S economy was improving. She was appointed by President Obama in October, last year and approved by the Senate in January, 2014. Her work began when the Fed organization required winding down its huge economic stimulus program. Therefore, Yellen would be required to meet the congressional committee to review the economic regulations and policies. However, the policy makers urge her to take the shortest time to resolve the problem.
The Fed has designed the stimulus program to ease inflation and reduce the unemployment rate. This process involves buying of the fixed income securities. The securities are bought on the open air market so that, in the long run; they will lower the interest rate. These include the mortgage-backed securities and the U.S treasuries. For example, in 2013, the Federal Reserve planned to purchase over $85 billion scurrilities in the open market (Federal Reserve Bank of Chicago (FRBC), 2014).
The Federal Reserve Committee is set to review the Fed’s fund rate. The rate would enable the banks to balance and maintain their reserves at a given level with the Federal Reserve. It is required that each bank member meets the target at the end of the day. In the long-run, this target would ensure the price stability and employment through lowering the interest rate to attract investors (Brezina, 2012). The Fed committee expects that this monetary policy would remain appropriate until the time that the asset-purchasing program ends. On the other hand, FRBC (2014) asserts that the policy makers anticipated low federal fund rate would maintain the unemployment at the level of 2,5%. The FOMC also expects that the inflation rate would reduce below 2% or stay at that level. Therefore, the buying of bonds would inject money into the economy while selling the bonds would take money out of the financial system. The Federal Reserve committee has to maintain and influence the lending rates between banks.
This is a funding system whereby “market participants meet the required credit needs of small businesses and households” (BGFRS, 2014). This is achieved through the support of the asset-backed securities secured by loans from businesses of different sizes and various consumers. For instance, the Board of Governors of the Federal Reserve System (BGFRS) (2014) asserts that the FRBNY would lend over $200 billion to holders of a given ABS backed with recent consumer and business loans. At the same time, the TARP would provide $20 billion as collateral to protect the FRBNY loans. Although George argued that this high lending level would increase the long-term inflation, the FRBNY would only lend amount equal to the existing market value (Saphir & Spicer, 2014).
FOMC has received much information regarding the expansion of the economic activities for reducing unemployment, inflation, and interest rate. Although the labor market is improving, unemployment rate remains at the pre-recession peak. Economists argue that the fiscal policies adopted by the policy makers restrain the economic growth in the sense that it limits the household spending and investment (Brezina, 2012). Nonetheless, the unreasonable lower the health and energy prices affect the inflation rates and results in the continuous inflation variation. This challenges the policy makers because they are mandated to reduce inflation and maximize employment opportunities. As such, it would be difficult to increase the health cost, which is a challenge to many people.
The policy required that the Federal Reserve continued to purchase the mortgage-backed securities at the pace of $40 billion and treasury securities at $45 billion per month (BGFRS, 2014). However, economic experts explain that this method would alleviate inflation only in the short run. Therefore, in order to maintain the long-term low interest rate, the policy makers ought to revise the buying trend downwards. In addition, this would help accommodate the labor market and inflation rate.
Similarly, scholars argue that the policy makers take into account neither traditional nor new policy response to deal with the situation (Brezina, 2012). The monetary policy needs to accomplish the total recovery of the US economy. However, the policies did not take into account some of the traditional policy response such as the resource mobilization. For instance, lack of inadequate utilization of resources has affected the workers’ capacity to be productive. As such, there has been a decline in productivity and unemployment. The market mechanisms such as adjusting wages and prices would assist businesses in making profit hence facilitating employment and, at the same time, reducing the inflation rate. According to FRBC (2014), the new policies prevent the market from achieving its satisfactorily objectives. Therefore, this poses a challenge to the policy makers in the implementation and analysis of the strategies.
Unemployment, interest rate maintenance, and inflation affect many countries across the world. For example, in the Euro zone, the government struggles to maintain the inflation and deflation rates at the same time (Saphir & Spicer, 2014). This is because they have experienced fluctuation for a few months. In China, the government has reduced the interest rate to enhance capital flow into the emerging markets. The central bank boosted and encouraged the plan. The printing of cheap money attracted investors due to interest differential hence created the employment opportunities (Brezina, 2012). Although the inflation rate increased above 2%, the policy broke the vicious cycle of unemployment.
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