The FED’s View of Current State of The US Economy

Orcun Kahyaoglu


Fed’s most recent monetary policy is the dual mandate. The committee seeks to foster maximum employment and price stability. These actions are necessary to expand economy moderately.

Dual mandate refers to promote effectively the goals of maximum employment, stable price and moderate long-term interest rates (Federal Reserve Bank of Chicago, 2012). The unemployment rate part is more of a concern for the Fed at present. The high oil and gasoline prices at the first months of 2012 is expected to have a temporarily effect on inflation and it will run at or below the rate that it judges most consistent its dual mandate (Federal Reserve, 2012, para. 2).

The US economy has been expanding moderately. The unemployment rate has declined but remains lifted up. There is a continuity to advance for household spending and business fixed investment. The housing sector remains depressed. Recent inflation rate is high because of the high prices of crude oil and gasoline but in the long-term it remains stable (Federal Reserve, 2012, para. 1).

It is a common issue to compare the experiences of Japan in the late 1990s to recent US monetary policy. So there is this view circulating that the views Ben Bernanke, the Chairman of Federal Reserve, expressed about 15 years ago. On the bank of Japan are not inconsistent with US policies. His views and the policies today are completely consistent with the views that he held at that time. He made two points at that time to the Bank of Japan. The first was that he believes that a determined central bank could and should work to eliminate deflation that is, falling prices. The second point that he made was that when short-term interest rates hit zero, the tools of a central bank are not exhausted, there are still no other things that the central bank can do to create additional accommodation. The current situation in US is that US is not in deflation. When deflation became a significant risk in late 2010, they used additional balance sheet tools to help return inflation close to the %2 target. So the difference between the Japan situation in the late 1990s and US situation today is that Japan was in deflation and when there are deflation and recession, then both sides are demanding additional accommodation. On the contrary, US’s policy is extraordinarily accommodative (Bernanke, 2012).

Bernanke continued to explain the problems with the current deficit. An increase in the interest rates will affect government debt payments that can cause budget deficits. Bernanke asked Congress to deliver a spending plan that included putting the deficit on a sustainable path to recovery, but not at the expense of the fragile economic recovery (Forbes, 2012).

The Fed responds to the “Too Big To Fail” problem that they are increasing supervisory and regulatory oversight of large financial institutions.  Fed also tries to eliminate the problem by allowing failing of large complex financial firms, which come to the brink of failure.

Bernanke, B. (2012). Press Conference with Chairman of the FOMC, Ben S. Bernanke [Video tape]. United States

Federal Reserve. (2012). Press Release. Retrieved from: http://www.federalreserve.gov/newsevents/press/monetary/20120425a.htm

Federal Reserve Bank of Chicago. (2012). The Federal Reserve’s Dual Mandate. Retrieved from: http://www.chicagofed.org/webpages/publications/speeches/our_dual_mandate.cfm

Forbes. (2012). Bernanke: Sacrificing Price Stability For A Few Jobs Would Be ‘Reckless’. Retrieved from: http://www.forbes.com/sites/afontevecchia/2012/04/25/bernanke-sits-on-a-fence-qe-on-the-table-but-dangerous/