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Current Federal Reserve monetary policy will deter U.S. growth - Thesis Proposal Example

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Abstract US has officially entered into recession by the end of 2007 and it also resulted into an increased support from the government in the form of equity injection from the government. In order to save the financial system, government injected new funds while at the same time also executed an expansionary monetary policy by cutting interest rates and increasing money supply…
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Download file to see previous pages The overall debt position in US is also increasing thus making US Dollar as a less favorable global currency making it more difficult to make it preferred currency for conducting the global trade. All these factors therefore may render the effectiveness of the monetary policy as null and monetary policy alone may not result into desired results. Introduction US is going through the recovery phase of its business cycle after emerging from one of the worst economic crisis of modern history. What started as the subprime mortgage crisis soon emerged as a full fledge economic recession hampering almost all sectors of the economy besides resulting into depressed growth for the economy. The resulting collapse of the institutions therefore prompted government and federal reserve board to intervene into the economy and devise policies and procedures which could actually allow the US economy to resurrect on its own. Government injected money into different institutions in order to ensure that the liquidity position of the firms remain good while at the same time ensuring that the capital base of financial institutions is strong enough to sustain the losses. On the other hand, FED has also undertaken different policies in order to stimulate the economy while at the same time ensuring that the adequate aggregate demand is maintained in the economy. As a result of this, FED undertook steps such as slashing of the interest rates and quantitative easing as well as other measures to ensure that the economy is put back on track. However, these efforts may actually prove as detrimental for the overall growth prospects of the economy. This could be for number of reasons including commodity inflation which could result into higher core and headline inflation, inflation may be inevitable due to low interest rates thus effectively eroding the growth, higher debt burdens as well as the monetary expansion policy therefore may not serve the purpose. This paper will attempt to argue and discuss that the current policies of Federal Reserve may deter the economic growth in US. Commodity Inflation It has been argued that the correlation between the prices of different commodities is increasing over the period of time. Higher level of correlation between the prices of different commodities therefore suggests that the prices are interlinked and an increase in the prices of one commodity could lead to a chain event of increasing the overall price increase for other commodities. Stronger positive correlation between the prices of the commodities therefore suggest there are different factors which are effectively affecting the dynamics of different commodity markets and are creating a unifying impact on the market. (Derby) Commodities often serve as the input for the final goods and services therefore higher demand from the emerging economies such as China and India has actually fuelled the commodity prices also. Higher commodity prices therefore are resulting into higher prices for the finished products and therefore causing the inflation in the core and headline inflation also. It’s also because of this reason that food inflation is also increasing along with affecting inflation in other goods. (Calvo) Fed has adapted an inflationary monetary policy thus further fuelling the chances of having higher inflation. Higher inflation therefore can effectively ...Download file to see next pages Read More
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