Economics

Federal Reserve System is responsible for devising the monetary policy in the United States. Monetary policy should be set out in a way that it achieves the economic goals of maximizing employment, keeping the prices and the interest rates at a moderate level and increasing the economic growth. The recent credit crunch and collapse of major banks brought heavy criticism on the Federal Reserve System. Question that is now being raised is that are the policies of Federal Reserve System good enough to steer our economy out of turmoil Apparently there is no clear answer to this question due to the uncertainties that surround our economic system. Upon taking a look at the key indicators one gets a mixed feeling about the performance of Federal Reserve. Unemployment rate, which was 9.7 in August 2009 when the fears regarding the economy were at its peak, stands at the same rate in January 2010 after going through minor increases and decreases in the intervening months. This is not a promising sign.

Inflation, as indicated by the consumer price index stood at 219.086 in August 2008, is now at 216.687. This shows the recessionary signs in the economy. Customers have reduced their purchases because of lack of confidence in the economic system and less job security. The decrease in aggregate demand has brought down the CPI figures but this is not the end. The lack of confidence in the economic system and less spending by customers will lead to severe recession and consequently the standard of living will deteriorate.

The Fed has also reduced the interest rates as low as 0.25 but this has also not given any substantial results as customer credit and investment rates remain low. The consumer confidence level has decreased from 76 in Feb 2008 to 46 in Feb 2010. The US GDP contracted at an average rate of 2.4 in 2009. Although on a quarter basis, the GDP grew by 5.9 in last quarter of 2009 but this is only due to accumulation of inventory. When the firms will adjust to the increased inventory level, the production will decrease further, thus increasing unemployment.

Hence the conclusion is the Federal Reserve System has not been able to use monetary policy effectively to stabilize the economy. There is another instrument to control the economic affairs called fiscal policy. For monetary policy to be effective, it is important that fiscal policy should be congruent. Hence unless government taxation and spending policies are not in compliance with monetary policy, the economic indicators will not improve.