Question

What is the current state of the US economy and what policies (monetary/fiscal) should the federal reserve use for the economy?

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%. It is forecast that unemployment will continue at the natural rate. Inflation or deflation is not too much. U.S. Growth in GDP will slow down from 3% in 2018 to 2.1% in 2019. It will be 2% by 2020 and 1.8% by 2021. That's according to the latest forecast released at the June 19, 2019 meeting of the Federal Open Market Committee. A side effect of the trade war, a key component of Trump's economic policies, is the expected downturn in 2019 and beyond.

The unemployment rate in 2019 will be 3.6%. In 2020, it will increase slightly to 3.7% and in 2021 it will increase to 3.8%. That's below the 6.7 percent target of the Fed. Nonetheless, former chairman of the Federal Reserve Janet Yellen acknowledged that many employees were part-time and would prefer full-time work. Moreover, most growth in employment occurs in low-paid retail and food service industries. Some people have been out of work for so long that they will never be able to return to their high-paid jobs.

Because the Fed no longer sells the securities it holds, more demand will be generated in the Treasurys market. On the 10-year Treasury Note, that should have increased the yield. Long-term interest rates such as fixed-rate mortgages and corporate bonds should have been driven up. Alternatively, the fear of investors over global economic uncertainty has kept low prices.

By managing credit, the largest component of the money supply, the Federal Reserve controls inflation. That's why people say that the Fed is printing money. By open market operations and the fed funds rate, the Fed controls long-term interest rates. If there is no chance of inflation, the Fed can lower interest rates by making credit cheap. This increases liquidity and stimulates the growth of business. In the end, it decreases unemployment. When calculated by the Personal Consumption Expenditures Price Index, the Fed tracks inflation through the core inflation rate.

When it reduces interest rates, the Federal Reserve uses expansionary monetary policy. This is expanding credit and liquidity. This makes the economy grow faster, creating jobs. If the economy grows too much, inflation will be caused. The Federal Reserve is using contractionary monetary policy at this point and is raising interest rates. High interest rates are costly to borrow. Increased borrowing costs slow growth and lower the probability of higher prices for businesses. The Federal Reserve chairs are the main players in the battle against inflation. These are the heads who control the interest rates of the Fed.