Any economic policy in the US cannot be mentioned without the Federal Reserve System (Fed). Fed plays a crucial role in the US economy since it acts as the gatekeeper of the economy. It is also a part of the federal government. Basically, as Mark of CNBC (2015) explains, it is the bank of the US government comprising of a network of 12 Feds with a number of branches and regulates all national financial institutions. It is an independent agency that studies economic trends and makes better economic policy decisions. Thus, it is mandated to make sure the US has a good and sound banking system as well as a healthy economy. Recently, Fed submitted a Monetary Policy report to the Congress, pursuant to section 2B of the Federal Reserve Act that looked at the domestic, financial and international aspect of the economy. Consumer price inflation was one of the important monetary policies discussed in the report.
The slow rate of decline in both the energy prices and the non-energy import prices have contributed to the current consumer price pickup. In April, the price index change over the past 12-month in for personal consumption expenditure (PCE) got to around 1 percent which was higher than a quarter percent rate recorded the same date the previous year (FRB, 2016). Overall consumer Price inflation has moved from the lows that were recorded last year but remains below the longer run FOMCs objective of 2 percent. In the US, low oil prices have reduced the investment in the oil sector leading to some cutbacks in the production. A huge cumulative drop in crude oil prices reflects the lower prices of gasoline and other energy products by early this year. The prices at the pump have remained at levels substantially below those of last year. Similarly, prices of metals and agricultural goods have gone up since earlier this year. All this rise in non-fuel prices plus a weaker dollar helped push non-oil imports prices higher in May which is a first since 2014.
The policy proved ineffective and inefficient as it caused price instability. Inflation has increased a bit. Core inflation PCE prices rose by about 1-1/2 percent over the 12 months and ending in April. Over the past year, the trimmed mean PCE price index an alternative inflation indicator has increased. This Measure has somewhat run above core inflation over the period. The downward pressure on the inflation is a likely warning from factors like slack labor, product markets and upward movements in the oil and non-oil import prices (FRB, 2016). Therefore, inflation needed to be low and reasonably stable so that people would not waste resources thus protecting themselves from inflation.
There is no equity in the current inflation in relation to the monetary policy. As it increases there is a likelihood of a decrease in rates. If Consumer price inflation continues to persist below the Feds 2% target, the path of interest currently priced by the financial markets and the stakeholders is likely to change (Acocella, 2016). If the inflation persists expectations adjust to new and less familiar factors, long-term interest rates, holding all things equal, should respond equally.
Lastly, based on feasibility, inflation through the monetary policy could help cushion a future slowdown that might occur. The signs show that with the increased inflation, monetary policy in the US is reaching its limits. This makes it important for a collective response to a slowdown involving other policies, especially the fiscal one. Therefore, use an effective and balanced monetary- fiscal response is recommended as it will reduce the need to use unconventional monetary tools. In conclusion, the monetary policy in relation to a recent consumer price inflation proved to be ineffective, inefficient, unequal and unethical but with proper feasibility, the outcomes can be controlled.
The Federal Reserve: CNBC Explains. (n.d.). Retrieved from http://www.cnbc.com/id/43752521FRB: Part 1: Recent Economic and Financial Developments. (n.d.). Retrieved from https://www.federalreserve.gov/monetarypolicy/mpr_20160621_part1.htmAcocella, N. (2016). Macroeconomic paradigms and economic policy: From the Great Depression to the Great Recession. Cambridge, UK: Cambridge University Press.
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