For the last few years, it has been no secret that the economy and, more specifically, high unemployment rates in America have been alarming. As we learned in chapter 24, the Federal Reserve is expected to conduct monetary policy, maintain the stability of the financial system, supervise and regulate bank institutions, and provide financial services to banks and the government. However, recent debate between the monetary policy makers at the Federal Reserve have been limiting the Fed’s ability to properly address the economy’s issues and fix them.
It is safe to say that no one wants to see inflation occur and everyone wishes to lower the unemployment rate. Recent divides within the Federal Reserve about the causes of inflation have slowed their efforts to put an end to these two major issues. Parts of the monetary policy makers believe that inflation rises when unemployment is low and vise versa. The other half believes that “inflation could bite us at any moment” and that it has nothing to do with employment. Thus, we come to the conclusion of quantitative easing. This is when monetary expansion is put into place when the federal funds rate is close to zero. Quantitative easing helps support the economy by lowering long-term interest rates. Lower interest rates cause the investment demand curve to shift outward, also causing more spending and major purchases of durable goods like cars and household equipment. This increase in investment has a huge positive impact on gross domestic product (GDP = consumption + investment + government expenditures + net exports). Another impact that quantitative easing has on GDP is through net exports. When American interest rates are lower, this causes money demand to decrease therefore also lowering the value of money within foreign exchange markets. Quantitative easing is a main topic that most of the Federal Reserve agrees can help stimulate the economy.
So if quantitative easing is proven to help the economy, where is the debate? The argument continues and goes back to the fear of inflation. While some argue the policy would not cause inflation due to the weak economy, others stand strong saying an increase in growth will end up with a huge increase in inflation.
While the debate continues, I can see the argument from both sides. However, I do find it confusing as to why some of the Federal Reserve is so concerned about inflation. While I realize inflation is not favorable, one would think that the Fed would be more concerned with the current issues within the economy. Regardless of even the most drastic consequences of monetary policy, I think the Federal Reserve needs to stop this “fight” and find a policy to agree upon before unemployment rates rise even higher.
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