Fed Should Consider an Exit from the Expansionary Monetary Policy

Fed Should Consider an Exit from the Expansionary Monetary Policy

Introduction

The proposal of this paper is that Fed ought to quit an expansionary monetary policy within the shortest time possible. Negative changes have occurred in relation to the perceptions of the investors towards the current markets of the U.S. A shift of the asset prices drops and the rising volatility should compel Fed to look for an exit from expansionary monetary policy. Additionally, the inflows of portfolio capital from some foreign investors are reversing while others have reduced. This indicates falling offering of the holdings on local bonds and currencies. This shift is due to a reduction in market perception ideas of the purchases of the asset of the Federal Reserve. The basis of these shifts is Fed’s reference to unemployment and inflation in the US. The aim of the officials of the U.S is to obtain relevant data so that they can improve the conditions of the economy. The yield curves of the U.S are steepening and this reflects increases in regards to expectations of greater supply and premiums of the long term bonds. This is due to the expected increase in the rate of Fed funds. As such, Fed ought to start exiting this monetary policy.

The state of the economy of the U.S currently can be attributed to different factors including inflation, economic growth and unemployment. The economy experienced reduced interest rates of the Federal Reserve, increased oil prices and mortgages. Consumers buy few products due to high prices. Dollar weakening should be blamed on the Federal Reserve more so because dollar weakening is subjected to the reducing interest rates which leave it worthless. Currently, most U.S citizens use subprime mortgages in acquiring houses instead of direct buying. There is a big role that is played by this trend in causing economic downturn. The economy of the US seems stable. However, several considerations should be made to avoid future recessions. Currently, the rates of cornet inflation are 3.1% while the unemployment rates stand at 7.9%. The rate of economic growth in U.S is at 1.7% yearly (Baumol & Blinder, 2010). The past statistics of the economy show that the economy of the U.S is experiencing a downturn. As such, serious policy reforms must be made to revive this economy. As such, Fed ought to consider exiting from an expansionary monetary policy.

Although Fed should exit from this policy, the long term implication that the injection of reserves in massive CUSTOMESSAYSamounts will have should be considered. This country ought to avoid the cyclical unemployment which can lead to structural unemployment in the long run. This argument is related to concerns that the rates of full employment of unemployment are increasing. This promotes dependency on the increased unemployment. This situation begins with the cyclical unemployment while the end is structural unemployment (Mankiw, 2013). Costs that are related to policy tightening increase unemployment rates in a country. Nevertheless, full employment level and increased rates of inflation are uncertain. As such, Fed ought to continue the exit consideration the soonest time possible so as to come up with a long term strategy for economic development.

The exit strategy that Fed embraces should consider selling off the long-term assets as well as raising reserve balances’ interests. These strategies will cause long term increases in the interest rates. There will be a reduction in economic activity if interests are increased by the Fed soon. Long term increase in interest rates reduces demand for services and goods in an economy. It also encourages saving because of high rates of deposit while borrowing is discouraged by the increased borrowing cost. Additionally, exchange rates appreciation reduces exports. In general, increasing interest reduces wage growth, inflation and employment rates. Consumption is encouraged over saving by a reduction in interest rates as well as investment rather than borrowing. Economic activity is encouraged as well as employment rate. Regardless of the expected growth in the economy after reducing interest rates, linking interest rates with economic growth requires time. Consequently, Fed ought to consider exiting this monetary policy so as to improve economic growth.

The rising prices of housing are affected by the monetary policy of the U.S economy. The economic models that Fed adopted during the previous recessions contributed to the booming market for houses and this caused disruptive contractions of the inversions of yield curve. Rising prices of housing are beneficial to employment because of the markets and developments of booming housing. The models of standard economies show that housing developments are mostly related to housing monetary channels. Fed has always leaned on the housing prices. Hence, it has overlooked inflation and economic activity. The suggestion of this is that easing the policy during the burst of housing prices can help in preventing large losses in terms of economic activities. Wash, a former governor notes that the economic models of Fed have not been right for the past 4 to 5 years (Baumol & Blinder, 2010). This is because they have always emphasized on the housing prices while overlooking important economic growth elements that include economic activities and inflation.

In a nutshell, Fed ought to come out of the expansionary monitory policy within the shortest time possible. This is due to the unpredictably falling and shifting of asset prices combined with rising volatility. Economic growth will be impossible if interests will be raised by Fed any time soon since economic activity will be affected. There are some increased costs that relate to tighter policy and increasing unemployment rates in a country. Additionally, uncertainties about full employment level and increased rates of inflation are looming. The economic models of Fed have not been effective for the last 4 to 5 years because they emphasize more on the housing prices while overlooking economic growth elements that include economic activities and inflation. As such, Fed ought to consider exiting this monetary policy within the soonest period possible.

 

References

Baumol, J. W., & Blinder, S. A. (2010). Economics: principles and policy, update 2010. Boston, MA: Cengage Learning

Mankiw, G. N. (2013). In Fed policy, the exit music may be hard to hear. The New York Times. Retrieved from. http://www.nytimes.com/2013/11/24/business/in-fed-policy-the-exit-music-may-be-hard-to-hear.html