Question

Characterize the state of the economy.

Is the Fed more concerned about inflation or possibility of recession?

What is the stated direction of recent monetary policy? What policy actions has the Fed taken to confirm that direction? How those policy actions could affect your potential business decision making?

Answer 1

Depending on the key economic indicators, the U.S. economic outlook is favorable. The gross domestic product, which calculates the production output of the country, is the most important indicator. The growth rate of GDP is expected to remain between the ideal range of 2% to 3%. President Trump promised to lift economic growth to 4%. That's faster than fine. Growth at that speed leads to irrational exuberance that is overconfident. This creates a boom that results in a bust that is damaging. The factors causing these shifts in the business cycle are supply, demand, availability of resources, and the expectation of the economic future by the consumer.

The Fed has been focusing on preventing another recession since the financial crisis of 2008. The Fed created a lot of groundbreaking programs during the crisis. In order to keep banks solvent, they quickly pumped trillions of dollars of liquidity. Many were concerned that after the global economy improved, this would create inflation. The Fed developed an ambitious programs exit plan. This put quantitative easing to an end and its Treasurys purchases. The program created stock-based asset deflation in 2013, 2012 bonds, and 2011 gold. But it had an effect on lenders, not customers.

Targeting the inflation rate also ensures the Fed will not encourage inflation to rise well above the core inflation rate of 2 percent. When inflation crosses the target too much, the Fed will adopt a contractionary monetary policy to stop it out of control from spiraling. The current inflation rate shows you how well the Fed is handling inflation to find out how well the Fed is controlling inflation.

The federal funds target was lowered from 5.25% in 2007 to a range of 0% to 0.25% in December 2008 in response to the financial crisis and the "Great Recession." This was the first time that prices had ever been reduced to what is called the lower bound zero. The recession ended in 2009, but since the economic recovery was significantly weaker than expected in the years that followed, the Fed has repeatedly pushed back its timetable for interest rates to rise

As a result, the economic expansion was in its seventh year and the unemployment rate was already close to the Fed's full-employment estimate when on December 16, 2015, it started to raise rates. This was a departure from past practice— the Fed started to raise rates within three years of the conclusion of the preceding recession in the previous two economic expansions. Then the Fed raised rates in a series of steps to tighten monetary policy incrementally. The Fed raised rates once in 2016, three times in 2017, and four times in 2018—by 0.25 percentage points each time. The expansion became the longest in the history of the United States in 2019. The Fed decreased the federal funds target by 0.25 percentage points in July 2019. Usually, when the Fed begins to cut interest rates, it subsequently makes several reductions in response to the onset of a recession over a number of months, although the rate cuts are sometimes more modest and short-lived mid-cycle corrections