Outlook and policy statement - Term Paper Example

FED outlook and policy ment In the testimony provided by the FED Chairman before the Budget Committee, it has been d that the economic recovery that has been ensuing for the past couple of years is still continuing despite the slow progress in reducing the rate of unemployment in the US. The recovery process has been largely aided by the steps taken to ensure the stability of the financial system and expansions made to the monetary and fiscal policies coupled with a strong inventory cycle. However, the European debt problems that ensued halted the momentum gained from these policies and inventories and as a result the markets became volatile.

However, with the recent hike in consumer spending with a 2 ? percent increase annually witnessed during the third quarter of 2010 has provided hope that economic recovery will eventually occur. The increasing investments in equipment and software industry have given a boost to the recovery. On the housing front the hikes in home prices and construction costs have not been able to contribute to this growth and at the same time not drastically affected the recovery process. While the labor market has been unable to accommodate the huge losses of jobs during 2008-09, the number of job openings and the hiring rate is on a constant rise in the past recent months.

However, considerable time will be required in order for the unemployment rate to return to normalcy and this time period could have a lasting impact both on the financial status of those unemployed and also on their skills and future employment and earning prospects. The testimony also notes the downward trend witnessed in the inflation rate compared to the previous years. This trend has been mainly attributed to the struggling job market and the associated decrease in utilization of resources.

However, the inflation expectations in the long-run are expected to remain stable. With this sluggish economic growth the monetary policies and projections of the Federal Open Market Committee (FOMC) to achieve maximum employment rates and stabilize prices are unlikely to be realized in the near future. The committee also predicts a lower inflation level for some more time which might increase the risk of deflation. In case of deflation, the economic progress would be further hindered with lesser number of companies engaging in both investments and hiring practices.

Such a situation would increase the debt amount and also the borrowing costs. The FOMC can only respond to such a situation by reducing its target for the federal funds rate, which is already close to zero and hence no further reductions can be expected. Considering the present economic status the FOMC has offered to purchase assets to the tune of $600 billion in Treasury securities by the second quarter of 2011. The low level of economic activity has further added to the burden of the fiscal policymakers and their plans to aid the deteriorating fiscal position following the recession.

The federal budget deficit is also expected to remain elevated even after the economy comes out of the recession period as projected by the Congressional Budget Office’s (CBO) alternate fiscal scenario. These projections, however, have ignored the adverse effects of the increasing debts and deficits on the country’s economy as such a situation would bring along long-term adverse effects on the country’s output, income and living standards. Thus such a situation definitely calls for the introduction of credible programs which are aimed at reducing future deficits.

The recently proposed plans by the National Commission on Fiscal Responsibility and Reform could be adopted in order to bring about some changes in the current fiscal scenario. Implementing reforms pertaining to the tax policies of the government, encouragement provided to the work force, enhancing research and development within the country and improving the infrastructure provided to the public along with suitable work incentives for the working class will all lead to a more productive economy and will pave way to effectively handle the present economic recovery.

Thus it would be wise to act now rather than to increase the financial burden both on the government as well as the general public. Reference Bernanke, S. Ben. “The Economic Outlook and Monetary and Fiscal Policy.” Federalreserve.gov. Board of Governors of the Federal Reserve System, 7 Jan, 2011. Web. 21 Apr. 2011. http://www.federalreserve.gov/newsevents/testimony/bernanke20110107a.htm