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Should Feds Continue With Expansionary Monetary Policy Or Exit Strategy?

1015 words - 5 pages

Over the past few years, the Fed had been trying to heal the economy from the recession by lowering the interest rate near zero in order to raise the inflation, increasing the price of housing and household wealth. This will encourage more people to buy products or services, causing an increase in consumers spending. Based on the data given by the U.S. Department of Commerce today, the economy is now healing from the recession with the expansionary monetary policy. However, some people argue that it takes too long for the recovery to happen and suggests that it is time for the Fed to come out with an exit strategy. However, I think the Fed should stick with its policy because it manages to improve the economy. Therefore, I think the Fed should stay with their strategies until there is a clear evidence of an overwhelming economy before thinking about an exit strategy.

According to the U.S. Department of Commerce, the Real GDP increases at a rate of 3.6 percent in the third quarter of 2013. Also, the Federal Reserve Economic Data (FRED) announces that the unemployment rate has reached its lowest state at 7 percent since 2009. As for the inflation rate, the U.S. government published the latest annual inflation rate, which is 1 percent. Compare these data to the 2008-2009 recessions, the GDP growth rate for 2008 is -2.7 percent and -5.4 percent for 2009. As for the unemployment rate for 2008-2009 recessions, the peak was at 10 percent. For inflation rate during the 2008-2009 recessions, the base is at -2.1 percent. In contrast with the previous recessions in 2001, the 2008-2009 recessions drop the private consumption, lowering the consumer confident. Because of this, the recovery period will take longer than the previous recessions.

Some are concerned about the long run effect of the unemployment rate, one of them which might cause a permanent damage on the economy based on the theory of hysteresis. Hysteresis is “an ugly word for an increasing ugly economic situation.” In Greg Mankiw’s article, he mentioned that “One possible reason for hysteresis is that the long-term unemployed lose valuable job skills and, over time, become less committed to the labor market”. Based on his statement, the cyclical unemployment will lead to structural unemployment in a long period of time. When this becomes structural unemployment, unemployed may lose the skills over time, causing them to be less committed to the labor force and the economy. In order to solve this situation, the Fed has to consider the unemployment rate. If the unemployment rate rises, then Fed will need to think of an exit from expansionary policy. But if the unemployment rates decreases, then the Fed can stick to its policy. As for the other concerns, some were worried the inflation rate caused by the expansionary policy. They are afraid that it might unleash higher inflation and that inflationary expectations are bound to jump at any time. By solving this situation,...

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