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Fed Expansionary Monetary Policy Essay

864 words - 4 pages

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, growth will be slower due in part to the idea that services cannot be produced or exported in the way goods can be produced and exported. With services it is not feasible to produce in advance for demand - one has to actually wait for demand to produce that service, then hire workers and pay them accordingly.
Moreover, there are long-term concerns that would arise if the Fed were to digress from the expansionary monetary policy. With higher reserves (money that the Fed gives banks to lend and accumulate profit in exchange for assets), inflation will increase because there is more money going around in the economy where the unemployment rate is low. In the current economy, the problem of unemployment has been mitigated through the expansionary monetary policy, but not to the greatest possible extent. A problem at hand is wage rates do not accommodate inflation. If the Fed...

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