Current Monetary and Fiscal Policies in the Us

2021-05-06 20:08:29
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The Federal Reserve (the Fed) gives the definition of monetary policy as its actions to influence the availability and cost of money and credit (Marc, 2016). Congress has the oversight responsibility of ensuring that the Fed adheres to its statutory mandate of ensuring maximum employment, stable prices, and moderate long-term interest. The Fed has been delegated the responsibility of formulating and applying monetary policies.

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The monetary policies currently in place are still unprecedented from the great recession of 2008. The Fed is still yet to halt monetary stimulation even with the economy having adjusted to normal growth. The Federal Reserve decreased funds rate to a final of 0% to 0.25% in December 2008, zero-bound level, in order to counter the recession (Marc, 2016). They remained there until the Fed began gradually raising rates on December 16, 2015, with a view to tightening monetary policy.

Since the economy is out of the zero lower bound, monetary policy is now less stimulative, the Fed is however still adding stimulus to the economy as long as rates are below the neutral rate or the long-run equilibrium rate. Apparently, the Fed intends to keep the stimulative policy in place for some time it currently expects that economic conditions will evolve in a manner that will warrant only gradual increases in federal funds rate (Marc, 2016).

Since the economic recovery was weaker than expected, the Fed repeatedly pushed back the time frame for raising interest rates. Therefore, contrary to past practices where the raising of interest rates begin within three years of the end of the recession, the economic expansion was in its seventh year, and the unemployment rate was already near the Feds estimate of full employment when it began raising interest rates.

The Fed currently has a large balance sheet also as a result of the 2008 financial crisis. The Fed lowered its rates to below the zero lower bound in an effort to control the crisis. At below zero lower bounds it was impossible to provide any further stimulus through conventional policy hence resorting to unconventional policy to provide further stimulus to the economy (Carvalho, 2012). This was done in three rounds of large-scale asset purchases of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS) beginning in 2009, popularly referred to as quantitative easing (QE). The third round was completed in October 2014, at which point the Feds balance sheet was $4.5 trillion which was five times its pre-crisis size. The end of QE marked the first step to normalize monetary policy (Marc, 2016). The Fed elected to raise rates while maintaining the balance sheet at its current size to normalize monetary policy over selling its assets to reduce its balance sheet. This has been done by the increases in the interest rate the Fed pays banks on the reserves deposited at the Fed and reverse repurchase agreements.

The Fed has been slow to remove monetary stimulus in the case of an economic relapse into recession. There is also not an agreed opinion on how quickly the monetary stimulus should be removed in the economic world since a recession of this severity with the given economic conditions has not been witnessed before. CBO projects unemployment rate at a little lower than the estimate for full employment in 2016 provided by the Fed. Whether or not the monetary stimulus should be removed depends on how much slack there is in the economy. The Fed expects full employment by 2017 and a rise of inflation to 2% in the medium term (Marc, 2016). If these estimates are correct, monetary stimulus will be completely removed by 2017 wit no economic kickbacks due to prolonged use of stimulus.

Economists say that there is a large gap between actual output and potential output and the Feds preferred measure of inflation has been slightly below its 2% goal since 2013. The Fed has recognized this fact, which explains the reluctance to remove the monetary stimulus just yet. The recent experience in the Eurozone and of Japan since the 1990s, when there was deflation and the economic expansion suddenly dropped, illustrate the risks of removing monetary stimulus too soon after a financial crisis.

Inflation has remained low thus far, which is abnormal for a continuation of stimulative monetary policy when the economy has attained full employment usually leads to rising inflation (Cogan et al., 2009). The unconventional policy has also resulted in above-average growth in the money supply which is a ticking time bomb as far as price stability is concerned.

The Fed raised interest rates in December 2015, for the first time since the Great Recession (Marc, 2016). This became the first time in recent years that U.S. short-term interest rates were rising relative to other countries. This relative difference in rates should attract capital flows into the country, which should subsequently result in the strengthening of the dollar. Thus far this has been proved true with a steady increase in the value of the dollar since the third quarter of 2014 (Marc, 2016). The strong dollar has reduced total spending by reducing demand for exports, which are currently higher priced.

Government spending as a percentage of the GDP has been increasing even with the drop in GDP during the recession. Government spending as a percentage of the GDP reached 41.43% the 3rd quarter of 2009, the highest since World War 2 (CBO, 2015). The government increased its spending on a policy to inject more money into the economy to stimulate growth. The 2015 deficit was $439 billion; the deficit is expected to increase with CBO estimating the 2016 deficit at $644 billion. If the actual value is around this estimate, the deficit will be 2.9 percent of the gross domestic product, which will mark the first time that the deficit has risen in relation to the size of the economy since peaking at 9.8% in 2009 (CBO, 2015). CBO expects an increase in public debt by 2% since 2016 to peak at 76% of GDP. This will be the largest percentage of public debt in relation to GDP ever recorded since World War II (CBO, 2015)

Effect of possible changes in monetary and fiscal policies on the supply and demand of your product or service

A reduction in interest rate in the short run is an example of an expansionary monetary policy. The result is the increase in interest-sensitive spending, ceteris paribus. Interest-sensitive spending includes debt financing for physical investment by firms, residential investment by consumers and consumer durable spending by households (Cwik & Wieland, 2009). Since it is profitable for firms to borrow as interest rates are low, and consumer demand is high, there is an increase in investment. With the low cost of investment, the company is able to source supply of research and development funds and marketing research through debt financing, therefore, increasing supply(R&D) and demand (marketing research) for the product. Lowered interest rates also encourage exchange rate depreciation that causes exports to rise and imports to fall, all else equal. A possible increase in interest rates, should the Fed completely abandon stimulative policies will result in a reduction of spending in the economy. The extent to which greater interest-sensitive spending results in an increase in overall spending in the economy in the short run partly depends on how close the economy is to full employment (Corsetti et al. 2009). For economies nearing full employment, increasing spending usually causes inflation problems. For an economy that is far below full employment, it is easier to control inflation pressures. Since the recent analysis by the Fed, the economy is approaching full employment hence greater interest-sensitive spending will have little impact on supply and demand of goods (Marc, 2016). The US, however, showcases a trend of a rapid increase in the inflation rate when the growth of money and credit is rapid. The growth of money and credit in the US, therefore, does not substantially increase GDP nor move the country any closer to full employment. This can be explained by sticky wages and prices since there are a series of contracts between suppliers, producers and laborers; there will be little change in wages and prices which will prevent any growth in employment and consequently GDP (Tcherneva, 2008). Expectations are also slow to adjust to the longer-run consequences of major changes in monetary policy. This slow adjustment further adds rigidities to wages and prices (Marc, 2016). In the short run, after a period of around eight quarters, economies will post a large increase in output and employment due to a rise in aggregate demand with no increase in prices and wages as a result of sticky wages and prices. In the long run, however, contracts are changes to reflect the economic situation, and there is an increase in wages and prices (Cogan et al., 2009). With changed expectation and adjusted wages and prices, there is little change in output and employment. If this theory holds, the demand and supply for the product will gradually stop growing and stagnate at a given value in the long run.

Economies with high endemic rates of inflation, however, show rapid adjustments in price. During the final stages of hyperinflation, rapid rates of growth in money and credit barely alter GDP growth and employment. High rates of inflation occur when there is a sudden boom in the economy, and currently, the Fed has maintained the economy at stable levels hence room for growth for the demand of Johnson & Johnson baby shampoo.

In 2016, the federal budget deficit is expected to increase in relation to the size of the economy, for the first time since 2009 (CBO, 2016). If current laws remain unchanged, this will not affect the demand and supply of the product. Political constraints usually prevent increases in budget deficits from being fully reversed during expansions. Stabilization policy should be tightened as often as it is loosened since aggregate spending is extremely erratic with peaks and lows in any given business cycle. Increasing the budget deficit is however always more popular than implementing the spending cuts or tax increases necessary to reduce it. As a result, the budget has been in deficit for all but five years since 1961, which has led to an accumulation of federal debt that gives policymakers less leeway to undertake potentially a robust expansionary fiscal policy, if needed, in the future. CBO projects that with this trend debt held by the public will also grow significantly from its already high level, by 2026, but with the public gradually adapting to its debt year by year, this should not greatly affect the product.

From the above data, the baby care segment has had stable revenue over the years 2011 to 2014, and that is expected to remain the same (Johnson & Johnson, 2014). This means, therefore, that to those that use Johnson and Johnson baby shampoo; it is more of an essential than a luxury but for the rest, it is a luxury. Johnson and Johnson's baby shampoo have different levels of elasticity of demand in different markets, therefore. In the high-end market, its demand is inelastic while for the lower end market its demand is elastic.

Effect of Monetary and Fiscal Policy on Company Financial Performance

The continued use of stimulative monetary policies could affect the macro economy hence the demand for products including Johnson and Johnson Baby Shampoo. Low rates, for example, have been in place too lo...

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