This paper discusses the Federal Reserve Bank decisions regarding interest rate adjustments, demonstrating the difficulty of predicting the myriad of forces affecting the US economy.
Written in 2008; 1,218 words; 5 sources; MLA; $ 41.95
Paper Summary:
This paper contrasts the classical economic thinking with current actual economic occurrences. Classically, economics suggests the central bank of the United States, the Federal Reserve Bank, should raise the rate of interest to cool down a potentially overheated economy that may spiral into inflation, and lower the rate of interest to encourage spending amongst thrifty consumers who are saving when recession looms upon the horizon during an economic slow-down. However, the paper states that this is not the case in reality. The paper demonstrates that the Fed's own lack of confidence in its predictions highlights the difficulty of predicting the complex array of forces that affect the economy. Some examples mentioned include, consumer optimism, natural and political forces, and other areas beyond the Fed's immediate control, which must come into play when the Fed sets the rate of interest. The paper suggests that the Fed may want to be more cautious in creating monetary policy for the economy, because it can affect many lives in doing so. However, it asserts that the Fed's influence is only likely to increase rather than decrease in the future, and all consumers can do is attempt to alter their buying and borrowing habits in light of their own predictions of the Fed chairman's behavior.
From the Paper:
"Today, the Fed has held the key interest rate steady at 5.25 percent for 'just over a year' and seems unlikely to raise rats in the future ('Public affects inflation,' AP Wire, 2007). But although it has defended its recent policy, the Fed admits that its decisions are never a science, and it weights the potential accuracy of forecasts in light of consumer psychology. The current chairman Ben Bernanke said this means that the Fed cannot ignore the threat of inflation anymore than it can ignore indebted consumers who are worried about the effect of high interest rates upon their monthly budget. 'If investors, consumers and businesses feel confident that the Fed will keep prices stable...they may be less inclined to act in ways that could aggravate inflation,' because 'these groups may be less inclined in such circumstances to worry that inflation will eat away at investments and paychecks, and might feel better about longer-term financial planning' ('Public affects inflation,' AP Wire, 2007). In short, consumers living off of their assets, like retirees, may be more willing to spend more freely if they feel those assets are not in jeopardy."
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