Complicating Bernankes Balancing Act - Essay Example

Large countries, like the U.S., used to alter their monetary policies according to the situation of themselves. For example, in the past, the U.S. could keep her inflation rate under control easily and effectively by adjusting the interest rate to the right level. However, in the world of globalization, as the world economies are becoming more interdependent, as supported by the increased trading volume in the passage, the level of interest rate would also affect the trade deficit issues between the U.S. and other countries as foreign capital is in need to finance the trade deficit.

This is probably a main concern of the U.S. since she urged China to revalue yuan a few months ago. All these factors pressure the Fed to find the right level for its interest rate without sacrificing the U.S. economy in any aspect. It is a tough task as the influence of the U.S. monetary policies is not as powerful as it was before the EU set up and the Asian markets emerged.ReferenceCooper, James C. "What's Complicating Bernanke's Balancing Act". BusinessWeek online. 27 Feb. 2006. < http://www.

businessweek.com/magazine/content/06_09/b3973034.htm> The double whammy that could ignite inflationThe double whammy that the writer describes in the article was that the efficiency gains are slowing down, which constitute a slowing productivity growth, while at the same time, labor and other costs that keep the firms operating are on the rise. This double whammy put pressure on companies to mark up prices in order to ensure profits, which might ignite inflation. A similar situation did happen in the late 1990s when it happened that the Asian Financial Crisis in 1997 and the financial turmoil after the Russian debt default in 1998 had kept the dollar strengthened, which prevented the price level of the U.S. to increase to offset the additional costs.

However, the world situation has changed greatly recently and the dollar is much weaker than it was in the late 1990s. Therefore, the interest rate decision by the Federal Reserve would be crucial to the future path of inflation. (Cooper, 2006)In fact, the double whammy described by Cooper could lift inflation up. This rising price levels mean that U.S. goods are becoming more expensive in international trade and the demand would decrease. If the Federal Reserve does not adjust the interest rate properly, the dollar would be weakened due to the growing trade deficit.

As a result, the economy of the U.S. would suffer because the price level takes time to readjust. Globalization also lengthens the process of price level readjustment because U.S. dollar is a common currency for trade in many economies apart from the U.S. Therefore, unless the Federal Reserve finds a right level of interest rate, the double whammy does not only affect the U.S. economy but also economies in the rest of the world.ReferenceCooper, James C. "U.S.: The Double Whammy That Could Ignite Inflation".

BusinessWeek online. 20 Mar. 2006. < http://www.businessweek.com/magazine/content/06_12/b3976035.htm> Make-up paper 1: Summary of U.S.: What Could Spoil The Fed's Slowdown ScenarioCooper raised his doubts over the Federal's recent forecast of slower growth, tame inflation, and less pressure on the labor markets and production capacity because this projection is not supported by the conflicting figures in the labor market. Job vacancies are growing fast enough to pressure further wage growth, while the recent trend in productivity growth has slowed, inducing the companies to raise prices.

As the Federal's forecast does not play out the way policymakers would like, and the rising wage and slowing productivity growth are likely to cause inflation in the near future, the writer queries the projection of the Federal and expects a rate increase in June.