The Federal Reserve Actions Towards Inflation

Inflation is one of the many economic heats that confront the world. Economic experts have always congregated to look for solutions by developing strategies to deal with inflation. Its adverse effects have made the issue to be the most understood aspect of the global economy by the learned and those who are not learned. There are many contributors to inflation: the demand for a commodity being higher than the supply, production cost being higher than the value of the output, industries not having raw materials for lack of replenishment, a monopoly on production dominating the market, and the law of diminishing returns dominating the market.

Since the 2008-2009 inflation, the Federal Reserve took a different stand from what many had expected. The view was to raise short-term rates on loans to a feasible level. According to the Federal Reserve chairman, economic recovery was purely based on monetary policy. The reserve was optimistic on the state of inflation that through monetary policy, it would be brought to a manageable level. With the help of the central bank to maintain price stability and the Federal Reserve monetary policy, there was some hope of bringing inflation to the lowest level possible. However, the greatest concern was the level of monetary effects from both the Central Bank and the Federal Reserve on the prices of basic commodities. If prices go higher than normal, chances are, it will affect the low-income earners and the gap between those who have and those who do not have will never be bridged. The economically able citizens will continue dominating the market while the rest will suffer in disability to provide basic needs to their families.

Monetary policy, being associated with money is a key element to consider as a topic for discussion. The value of money dictates the purchase and the sale of goods, demand for and supply of goods in the market, and encourages the increase or decrease of production quantities. Availability or lack of money, production and circulation, value maintenance, and usage are key factors that affect money as a commodity. Depending on how the issues concerning money are handled, it may lead to either inflation or a stable economy. The Federal Reserve’s approach to handling the issue from the monetary policy point of view was one valid way of working through inflation.

The move to affect prices was anticipated to affect the world economy. Since the dollar is the standard global currency, the move had adverse effects on developing countries, especially in Africa. However, in the long-run increase in liquidity will ease the economies from the hard grip that the private sector had and in turn open doors for companies to access loans. However, the success of these plans will highly rely on the Federal Reserve to stretch the liquidity level to the final bit by raising interest rates. The move on the interest rate will have to be handled well to protect the government from incurring any more debts to sustain the basic needs of the ever-growing population. The budget would have to be higher than normal, which means the government would need economists to advise on how well to bring it to a manageable level without necessarily lowering the living standards of citizens.

For the move to be successful, an aspect of proper timing needs to be put in place. Some issues like unemployment would have to be dealt with first to reduce the risks of making life too hard for economically disabled people. Though creating employment opportunities for the huge unemployed population could take some time, it is believed that the government will finally get there. Having low levels of employment would play a big part in allowing the recovery time to run smoothly since inflation by then would have been restrained.

Another obstacle to deal with before implementation is ensuring that the industrial output is high. Companies, whose products are consumed locally or abroad, should be improved in both quality and quantity, and the market for their commodities be created to enable economic growth. When the issue of employment and the output level is high, any set strategy will work as long as its implementation is well taken care of by considering the risks involved, since the good economy of today does not necessarily mean the same will be the case tomorrow.

There is anticipated risk with trusting the Federal Reserve to help the economy through their move to raise the lending rates if the Federal Reserve acts slowly, inflation will have enough time to breed to higher levels, if faster without proper calculation of risks, the economy of U.S. will not be salvaged in time which in turn will cause it to slide back to where it was, that is, recession. To test the rate of raising policy, the Federal Reserve needs to assure the public that the move is safe, one can enter and exit from the financial market without necessarily incurring losses that will further inflation. In that spirit, the Federal Reserve will have to move out of the financial market after evaluating that they have enough strategies and have taken necessary measures to exit and are in a position to implement the monetary policy.

When the Federal Reserve is implementing the rates raising policy, they need to watch the treasury debts incurred already; they need to make the move in a way that the debts, especially the ones that affect GDP would be paid slowly as the policy takes shape. The rates need to be raised consistently to be able to meet long-term stable inflation. The Federal Reserve’s mandate would be to ensure the policy works amid major financial adjustments, and that interest payments reach heights that would be related to national GDP.

The Federal Reserve collaboration with the central bank to handle inflation will be the best idea. This will work well in maintaining low inflation, increasing financial market stability reducing the risk of further inflation, and, in the end, meeting the target of the interest rates. The central bank should work to maintain price stability to increase monetary power. The central bank’s efforts should be channeled toward setting targets for how low and how high inflation should go so that it can be monitored by an economist to avoid going over or under the set targets. This will make the approach so flexible that the economy is not defined by only one side but can be viewed from both angles, high or low targets. With its flexibility, the policy can be adjusted quickly in response to macroeconomic developments. These targets will serve as a framework for monetary policy within which inflation can be bearable.

Price stability if well implemented would contribute to the best performance of money as a legal tender, the price system would work better than before; accountability and credibility will be promoted in that the banks will be limited in the power to control the value of money in the market. As price stability is being considered, it is paramount to be able to protect the assets’ prices so that they will not be affected. Equities and shares are known not to have stability; they depend on the trade level of a certain share over the other in the market and should not affect decisions being made on the monetary policy. Theirs is a balloon that can burst anytime depending on the level of exposure to heat in the market.

To avoid hitting the market and finding the members of the public unaware, the Central Bank should advise the members of the public on their take and further advise them on the possible outcomes plus motivate them by giving them hope that things are in control. This is because issues of inflation are not only understood by experts, but by everybody who is under the government. It will not be easy since many households have already felt the heat of inflation and the issue of raising rates is just an indicator of more financial burdens on the citizens. However, the Central Bank and the Federal Reserve have the responsibility to attain the objectives and to inform the public of any changes at any given point. This will contribute to the patience level of the members of the public.

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